The Fed Bails Out AIG

Updated from 7:34 p.m. EDT

American International Group (AIG Quote) will receive an $85 billion bridge loan from the Federal Reserve aimed at keeping the giant insurer out of bankruptcy and preventing the acceleration of a world credit crisis.

AIG shares fell to as low as $2.42 in extended trading after reports spread of the agreement, which calls for the government taking an 80% stake in the company.

"The [Federal Reserve] Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance," the central bank said in statement posted on its Web site at 9 p.m. EDT Tuesday.

"This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy." The Fed said the AIG facility has a 24-month term.

Cramer on AIG's Rescue

The Fed said that "the interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries.

"The loan is expected to be repaid from the proceeds of the sale of the firm's assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders," the statement said.

The New York Times reported late Tuesday that the Fed and a group of executives from JPMorgan Chase(JPM Quote), Goldman Sachs(GS Quote) and other firms agreed that a banking syndicate to provide the $75 billion in emergency financing could not be arranged by Tuesday night.