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US Federal Reserve to rescue AIG with $85 billion loan

American International Group has announced that the Federal Reserve Bank of New York has agreed to provide a two-year, $85 billion secured revolving credit facility, after the federal officials failed to persuade private firms to prevent the bankruptcy of the struggling insurance company.

Media sources have reported that in return for the credit facility, the government will get an 80% stake in American International Group (AIG), and the company is likely to replace its management and CEO Robert Willumstad.

The federal loan doesn’t require the company’s liquidation or asset sale, however AIG, which has over $1 trillion in assets and substantial equity, is likely to consider options to sell the assets to repay the loan. The loan carries interest rate equivalent to the London inter-bank rate plus 850 basis points.

The loan is expected to protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis. A statement released by the US central bank said that the Federal Reserve Board made the decision with the support of the Treasury Department. The secured loan has terms and conditions designed to protect the interests of the US Government and taxpayers.

The downturn in the US housing market has affected the financial performance of AIG and placed the company on the verge of bankruptcy. According to reports, if AIG had failed to obtain the federal funding, its collapse would have impacted the global financial markets.