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AIG may get $85 bln bridge loan in govt-brokered deal

(Agencies)
Updated: 2008-09-17 09:21

Related readings: AIG seeks capital, mulls selling units Wall Street mauled by Lehman bankruptcy, AIG fears AIG seeks Fed lifeline Stocks slump over Wall Street turmoil

In a sign of how much US authorities have been trying to prop up the markets, the Federal Reserve Bank of New York took the unusual step of providing some $87 billion in financing to Lehman units to prevent disruption as customers flee.

Banks' cost of overnight borrowing surged above 10 percent, signaling extreme distrust among the institutions. That's about five times the typical level, given that the Federal Reserve's target for short-term rates now stands at 2 percent.

The two rates typically track each other. Overnight dollar deposit rates eased later, but were still at high levels.

Hours before Lehman's creditors were set to have their first formal meeting post-bankruptcy, there was a glimmer of hope for some of its roughly 26,000 employees.

Barclays agreed to pay $2 billion to buy Lehman's core US broker-dealer business, including equity, fixed income, M&A advisory, a person familiar with the matter said.

A potential bankruptcy filing by AIG could have a market impact of $180 billion, or 50 percent of total capital raised by financial institutions worldwide since the beginning of the credit crunch, according to one estimate.

Worries about the health of AIG, until recently the world's biggest insurer by market capitalization, spread to other asset classes.

Some firms ceased making markets in commodity securities backed by matching contracts from AIG on Monday afternoon, ETF Securities said. The affected securities are known as exchange-traded commodities (ETCs).

Earlier, New York Governor David Paterson told CNBC that the insurer had "a day" to solve its problems. A failure would result in a "catastrophic problem" for the market, said Paterson, whose administration oversees regulation of AIG.

Both Moody's and Fitch Ratings cut AIG's rating by two notches on Monday, while Standard & Poor's Rating Services lowered its rating by three pegs.

The downgrades meant that AIG's trading partners can require the insurer to post an additional $14.5 billion in collateral, according to an August 6 regulatory filing.

They could also result in the early termination of some contracts, requiring an additional $5.4 billion in payments, the filing showed.

"You don't just have a potential impact on the reinsurer side, you have it on the institutions that might be holding AIG paper," said Lorraine Tan, director of research for Asia at Standard and Poor's in Singapore.

"This would have a much bigger impact than a bank going down like Lehman or Bear (Stearns), or even a Wachovia (Corp) or WaMu in the US AIG has a much bigger presence globally."

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