US hands insurer extra $40bn

Government takes equity stake in AIG as it struggles with losses.

    Total government assistance to AIG goes to the tune of about $150 billion [GALLO/GETTY]

    The reworked AIG rescue plan also entails lowering interest rates on loans to the company, and taking residential mortgage-backed securities and credit default swap contracts off the insurer's balance sheet.

    Restrictions, in turn, will be placed on executive compensation at the firm.

    "These new measures establish a more durable capital structure, resolve liquidity issues, facilitate AIG's execution of its plans to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the US government and taxpayers," the Federal Reserve said in a statement.

    Financial reach

    Government officials expressed confidence that the loans - made using US taxpayers' money - will be repaid by AIG and said there is even some chance a profit could be made from the purchased shares.

    The $150bn the government has now made available to AIG is thought to be the largest amount of assistance ever provided to a single company.

    It further extends the government's reach into the country's failing financial system.

    A global credit crunch, caused by high-risk mortgage loans, caused a housing market collapse earlier this year destablising financial instuitions.

    The situation prompted the government to seize control of Fannie Mae and Freddie Mac, lenders that guarantee or own about 40 per cent of the $12 trillion in US mortgages, in September.

    Fannie Mae, however, has continue to post losses, saying on Monday that it was out $29bn in the third quarter due to a massive tax-related charge and a continuing rise in mortgage defaults.

    Barack Obama, the US president-elect, has pledged to push through a new economic stimulus package after he takes office in January.

    SOURCE: Agencies


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