Federal Reserve rescues AIG with 85 billion dollars to stabilize stocks

The Federal Reserve forged an extraordinary $85 billion rescue of insurance giant American International Group Inc., offering a respite from two days of chaos in the American financial system that shook markets across the world.

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The move came hours after the Fed resisted a cut in interest rates to buoy Wall Street, which staged a slight rebound anyway from Monday's biggest point drop in the Dow Jones industrials since the Sept. 11, 2001 terrorist attacks.

But the Federal Reserve helped allays fears of further financial turmoil with an $85 billion emergency loan to shore up AIG, the huge U.S. insurer reeling from billions of dollars in souring mortgage debt.

The Fed said Tuesday night that it was acting after determining that a disorderly failure of the company, whose financial dealings stretch around the world, could hurt the already delicate markets and the economy.

Asian stock markets partly recovered Wednesday after the U.S. government announced the bailout plan for AIG, but later dipped as the news failed to persuade many investors that the financial turmoil would ease soon. European shares were higher in early trade, and U.S. stocks headed for a lower open as investors nervously looked to the future.

Investors had feared that a failure of AIG, the world's largest insurer, would set off even more financial turmoil than the collapse the day before by venerable investment house Lehman Brothers.

AIG, a company little known off Wall Street, does business with almost every financial institution in the world and insures $88 billion worth of assets including mortgages and corporate loans.

Under the plan orchestrated by the Fed during a day of crisis talks, the U.S. government will provide an emergency $85 billion loan and in return receive a 79.9 percent equity stake in the company, similar to the way the government took control of faltering mortgage giants Fannie Mae and Freddie Mac.

The Fed said in a statement that an AIG failure could "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance."

Treasury Secretary Henry Paulson said in a statement that the Bush administration was working closely with the Fed, the Securities and Exchange Commission and other government regulators to "enhance the stability and orderliness of our financial markets and minimize the disruption to our economy."

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