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NEW YORK: The US Federal Reserve was close to finalising a deal to rescue teetering insurance giant American International Group (AIG) from collapse by extending an US$85-billion loan in exchange for a nearly 80-per-cent stake in the company, US media reported Tuesday.
All of AIG's assets would be pledged to secure the loan, according to the New York Times and CNBC business network, citing people briefed on the negotiations.
News of the talks came after Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke went to Capitol Hill late Tuesday to meet with top leaders of Congress, the Times reported.
Shares in AIG - a company with US$1 trillion in assets and tentacles in many markets - went on a roller-coaster ride on Tuesday, sliding 70 per cent at the open, swinging into positive territory and then closing down 21 per cent after a 60-per-cent plunge Monday.
New York Governor David Paterson earlier said AIG had one day to raise up to US$80 billion to stave off bankruptcy and avoid financial calamity.
"I think they have a day... we're in the moment right now as to whether or not they can put something together. I guess it would be US$75 to US$80 billion," Paterson told CNBC television.
In its first public statement since its shares went into a freefall on bankruptcy fears, AIG said its insurance, retirement and other financial services were operating normally.
AIG said its businesses "including its extensive Asian operations, continue to operate normally and remain adequately capitalised and fully capable of meeting their obligations to policyholders."
The statement added that AIG "continues to pursue alternatives to increase short-term liquidity in the parent company.
“Those plans do not include any effort to reduce the capital of any of its subsidiaries or to tap into Asian operations for liquidity."
David Kotok, chief investment officer at Cumberland Advisors, said the US central bank must act to avert a collapse at AIG that would be a calamity for markets, which went into shock after the Lehman Brothers' bankruptcy Monday.
He said that although AIG is not a primary dealer with access to the Fed, it "is a huge global financial enterprise... That is why the Fed must act."
"This has the appearance of a cascade or a contagion. Failure of Lehman Brothers has created contagion because of counter-party risk that was not contained by the Fed," Kotok added. "Failure of AIG will make this much worse."
Liz Ann Sonders, chief strategist at Charles Schwab & Co., said a Fed bailout might set a bad precedent.
"Some expect the Fed to offer the same treatment to AIG as it did to Lehman, but others believe the Fed will distinguish between its lending programmes and the use of taxpayer funds," she said.
"Nonetheless, the Fed's Board of Governors would need to approve the terms of any type of loan.
“And the bar is going to be set quite high as expanding the discount window to another class of firms brings with it Pandora's Box-type risks, as other companies would undoubtedly look in the Fed's direction for help."
In blow after blow late Monday, the three main rating agencies - Standard & Poor's, Moody's and Fitch - lowered AIG's credit score in a sign of solvency troubles for AIG.
Sonders said that according to AIG regulator filings, the rating cuts are likely to trigger up to 17 billion in collateral calls.
Far more than other insurers, AIG has been a big player in a complex parallel market called credit default swaps (CDS), financial instruments in which Wall Street companies take out a form of market insurance against the risks of bond default.
These products, often linked to the US real estate market, are at the heart of the current banking crisis and have led to massive write-downs of assets around the world.
AIG alone has written off US$25 billion amid spiking defaults on US mortgage payments in the United States.
- AFP/yb
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