Believing that its failure would further weaken the financial market, the Federal Reserve Board has authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG).
The Federal Reserve said that the loan would be repaid from the proceeds of the sale of parts of the firm’s assets, which will be sold off “in an orderly manner, with the least possible disruption to the overall economy,” with the U.S. Government receiving a 79.9% equity interest in AIG.
“The 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 Federal Reserve said in a statement.
AIG launched its Transportation Solutions service last October, offering workers' compensation, general liability, automobile liability, excess automobile liability, environmental/pollution, excess casualty and occupational accident insurance to fleets.
It is yet to be determined what effect—if any—AIG’s troubles will have on the fleets insured through AIG Transportation Solutions. The company hasn’t yet responded to FleetOwner’s request for comment.
The Fed’s move to rescue AIG comes after a whirlwind two weeks in the financial sector, beginning with the September 7th bailout of mortgage companies Fannie Mae and Freddie Mac, as the Treasury Dept. announced it would provide up to $100 billion to each company to maintain financial solvency. However, the government did not approve taxpayer money to save Lehman Brothers Holdings, Inc., which filed for bankruptcy on Monday.
The Fed announced yesterday that it would keep its interest rate at 2%, but said it would transfer an additional $70 million into the U.S. financial system to alleviate credit burdens.
Christopher Dodd (D-CT), Chairman of the Senate Committee on Banking, Housing and Urban Affairs, said, “This decision is a clear sign that the financial crisis – which is a direct consequence of this Administration’s neglect and wayward economic policies – continues to deepen. Actions that were inconceivable just days ago are now occurring in a manner and at a pace that is certainly cause for concern,”
However, Richard Shelby (R-AL), Ranking Member of the committee, opposed the loan. “I hope that they will not bail out, or get a bridge loan, to AIG,” he said. "Where do you stop? Where do you draw the line?"