The Fed Bails Out AIG - TheStreet

Updated from 7:34 p.m. EDT

American International Group

(AIG) - Get Report

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

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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) - Get Report

,

Goldman Sachs

(GS) - Get Report

and other firms agreed that a banking syndicate to provide the $75 billion in emergency financing could not be arranged by Tuesday night.

Earlier, it was reported that federal officials were reluctant to aid AIG with a bridge loan from the Fed, which the

insurer

sought in a Monday meeting.

"What is going on right now in New York has got nothing to do with any bridge loan from the government," Treasury Secretary Henry Paulson said in a Washington, D.C., news conference Monday, noting that the talks in New York revolved around a private sector solution to the crisis.

Cramer: Market's Fate Rests With AIG

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The downgrades by Moody's Investors Service and Standard & Poor's mean that AIG's trading partners can demand it post an additional $14.5 billion in collateral, according to a filing AIG made with the

Securities and Exchange Commission

in August, the

Journal

reported.

The downgrades dealt another severe blow to the insurer, which was still reeling from Lehman's bankruptcy filing and

Merrill Lynch's

(MER)

fire sale to

Bank of America

(BAC) - Get Report

on Monday.

AIG bought some time on Monday by gaining access to as much as $20 billion in capital through New York State's relaxation of insurance regulations.

AIG shares plummeted 58.1% to close at $5.09 Monday.

Managers at AIG were trying to put together a plan for a major restructuring that will likely include the sale of its aircraft-leasing unit and other assets, the

Journal

reported on its Web site Sunday, citing people familiar with the situation.

AIG will be allowed to use $20 billion in assets held by subsidiaries to help stay in business, New York Gov. David Paterson said in a news conference Monday. The insurer, which already has raised $20 billion in fresh capital in 2008, on Sunday turned down an offer from private-equity firm J.C. Flowers & Co. that would have allowed the investor to acquire AIG for $8 billion under certain circumstances, the

Journal

reported.

In addition to its aircraft-leasing arm, AIG was considering selling off assets related to property and casualty insurance, the

Journal

reported.

The reported moves come after a dizzying 31% drop in AIG's stock price Friday driven by investor worries that the company lacked sufficient capital.

This article was written by a staff member of TheStreet.com.