US government grants troubled insurer AIG $150bn in new bailout

The US government ripped up its eight-week-old rescue deal for AIG and signed a new $150bn (£96bn) plan that it hopes will be more likely to save the insurance giant from bankruptcy.

An original $85bn loan agreed in September, topped up by a further $38bn last month, had failed to plug the growing black hole at the heart of the company's derivatives insurance business, the US Treasury conceded yesterday.

Instead, in the biggest handout from its $700bn Wall Street bailout fund, the government will buy a $40bn stake in AIG, and make a further $60bn available in the form of a loan on less onerous terms than those previously agreed.

And in an initiative that other participants in the disaster-struck mortgage derivatives market will watch closely, the Federal Reserve will buy up the toxic assets that have brought AIG to the brink of bankruptcy.

The insurer, for years one of the most respected names in the life, car and home insurance business, branched into insurance of complex financial derivatives, but it failed to prepare for the big losses that its clients would face on products linked to US mortgages, which have collapsed in value because of the housing market slump. Many major banks and hedge funds rely on AIG to hedge some of their most dangerous investments and the Treasury had feared that the company's failure would cause a chain reaction throughout the finance industry. On 16 September, it in effect nationalised the company, advancing the initial loans and taking an 80 per cent stake, which will not change under the new arrangements.

Neel Kashkari, the Treasury official and former Goldman Sachs executive who is administering the $700bn bailout fund, known as the Troubled Asset Relief Programme (TARP), said the restructuring of the AIG deal was "necessary to maintain the stability of our financial system".

"We recognise that the financial system remains fragile and we continue to stand ready to prevent systemic failures. We worked with the Congress to ensure the TARP included sufficient flexibility to do just this," he said.

The Federal Reserve is putting $42.5bn into two special investment vehicles that will buy mortgage-related assets and other derivatives on AIG's books. Market participants said they would be keen to see what price the government would set for these instruments. That could cause holders of similar assets to adjust their values, potentially leading to a new round of losses.

Start your day with The Independent, sign up for daily news emails
News
newsAnother week, another dress controversy on the internet
Life and Style
Scientist have developed a test which predicts whether you'll live for another ten years
health
Life and Style
Marie had fake ID, in the name of Johanna Koch, after she evaded capture by the Nazis in wartime Berlin
historyOne woman's secret life as a Jew in wartime Berlin
News
news... and what your reaction to the creatures above says about you
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: A Customer Service Advisor is r...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn