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US government bails out insurer US government rescues insurer AIG
(20 minutes later)
The US Federal Reserve has announced an $85bn (£48bn) rescue package for AIG, the country's biggest insurance company, to save it from bankruptcy.The US Federal Reserve has announced an $85bn (£48bn) rescue package for AIG, the country's biggest insurance company, to save it from bankruptcy.
The plan involves a loan in return for an 80% public stake in the company.The plan involves a loan in return for an 80% public stake in the company.
AIG, which has a trillion dollars in assets and insures bank loans around the world, said it was continuing efforts to increase its liquidity. The rescue follows Monday's collapse of US investment giant Lehman Brothers, which caused share prices to plummet across the world's financial markets.
The rescue prompted a shares rally in Asia, with Japan's market up 2% in early trading. Meanwhile, Barclays said it had reached a deal to buy Lehman's US investment banking and capital markets businesses.
Correspondents say AIG's demise would have a far greater impact on the world's financial markets than that of the US investment bank Lehman Brothers on Monday. The rescue of AIG - which has a trillion dollars in assets and insures bank loans around the world - prompted a shares rally in Asia, with Japan's market up 2% in early trading.
The collapse of AIG would mean that many banks and investment funds in the US and around the world would lose their insurance cover at a time when defaults on payments are likely to rise. The board of the Federal Reserve made the decision "with the full support of the Treasury Department", it said in a statement, adding that the secured loan included conditions designed to protect "the interests of the US government and taxpayers".
Emergency meetingEmergency meeting
Treasury Secretary Henry Paulson and Ben Bernanke, the chairman of the central bank, the Federal Reserve, met senior members of Congress on Tuesday to brief them on the AIG bailout. US Treasury Secretary Henry Paulson refused to bail out Lehman Brothers, the fourth-largest investment bank in the US.
Big banks can no longer be under any illusion that they can make big, stupid financial bets and expect taxpayers to pick up the bill Robert Peston, BBC business editor Read Robert's blogBarclays eyes Lehman assetsCredit crunch jargon explainedBig banks can no longer be under any illusion that they can make big, stupid financial bets and expect taxpayers to pick up the bill Robert Peston, BBC business editor Read Robert's blogBarclays eyes Lehman assetsCredit crunch jargon explained
Correspondents say AIG's demise would have a far greater impact on the world's financial markets than Lehman's.
Many banks and investment funds in the US and around the world would lose their insurance cover at a time when defaults on payments are likely to rise.
Treasury Secretary Henry Paulson and Ben Bernanke, the chairman of the central bank, the Federal Reserve, met senior members of Congress late on Tuesday to brief them on the bailout.
The plan calls for the government to seize up to 80% of AIG and remove its management, similar to the way it took control of mortgage giants Fannie Mae and Freddie Mac.The plan calls for the government to seize up to 80% of AIG and remove its management, similar to the way it took control of mortgage giants Fannie Mae and Freddie Mac.
AIG's stock fluctuated widely on Tuesday, shedding 70% on opening before rallying to close down 21%. US President George W Bush welcomed the package, and the White House said the deal was made "in the interest of promoting stability in financial markets and limiting damage to the broader economy".
US Treasury Secretary Henry Paulson refused to bail out Lehman Brothers, the fourth-largest investment bank in the US. Market slump
Its bankruptcy sent shockwaves through global financial markets. Meanwhile, the Fed has left interest rates unchanged at 2%. The BBC's Matthew Price in New York said the bank had clearly decided an interest rate cut would not help to alleviate the short-term financial crisis.The global financial community is reeling from Lehman's demise
Early on Wednesday, Barclays announced it had reached a deal to buy Lehman's North American investment banking and capital markets businesses.
Meanwhile, the Fed has left interest rates unchanged at 2%. The BBC's Matthew Price in New York said the bank had clearly decided an interest rate cut would not help to alleviate the short-term financial crisis.
On Wall Street, the Dow Jones rallied on Tuesday, closing 141 points higher having on Monday suffered its worst day's trading since the September 2001 attacks on the US.On Wall Street, the Dow Jones rallied on Tuesday, closing 141 points higher having on Monday suffered its worst day's trading since the September 2001 attacks on the US.
But leading indices across Europe and Asia ended lower, with banking shares being the worst hit. Shares in Britain's biggest savings group, HBOS, initially dropped 35% before closing 22% down.But leading indices across Europe and Asia ended lower, with banking shares being the worst hit. Shares in Britain's biggest savings group, HBOS, initially dropped 35% before closing 22% down.
Central banks around the world responded by carrying out emergency measures to keep markets liquid.Central banks around the world responded by carrying out emergency measures to keep markets liquid.
The Bank Of England and the Bank of Japan injected £20bn (25bn euros; $36bn) and 2.5 trillion yen ($24.1bn; £13bn) respectively into their money markets.The Bank Of England and the Bank of Japan injected £20bn (25bn euros; $36bn) and 2.5 trillion yen ($24.1bn; £13bn) respectively into their money markets.
The extra funding came as the interest rates at which banks lend to each other rocketed - as they did at the start of the credit crunch.The extra funding came as the interest rates at which banks lend to each other rocketed - as they did at the start of the credit crunch.
Are you affected by the issues covered in this story? Are you an employee of AIG, Lehman Brothers or another financial institution facing uncertainty? Would you be willing to be interviewed by a BBC journalist? Send us your experiences using the form below.Are you affected by the issues covered in this story? Are you an employee of AIG, Lehman Brothers or another financial institution facing uncertainty? Would you be willing to be interviewed by a BBC journalist? Send us your experiences using the form below.
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