Feds pony up $85B to keep AIG alive

WASHINGTON - In a bid to save financial markets and economy from further turmoil, the U.S. government agreed yesterday to provide an $85 billion emergency loan to rescue the huge insurer AIG.

The Federal Reserve said it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.

It also could "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said.

Treasury Secretary Henry Paulson said the Bush administration was working closely with the Fed, the Securities and Exchange Commission and other government regulators to "enhance the stability and orderliness of our financial markets and minimize the disruption to our economy."

The Fed said in return for the loan, the government will receive a 79.9 percent equity stake in AIG.

The problems at AIG stemmed from its insurance of mortgage-backed securities and other risky debt against default. If AIG couldn't make good on its promise to pay back soured debt, investors feared the consequences would pose a greater threat to the U.S. financial system than this week's collapse of the investment bank Lehman Brothers.

The worries were triggered after Moody's Investor Service and Standard and Poor's lowered AIG's credit ratings, forcing AIG to seek more money for collateral against its insurance contracts. Without that money, AIG would have defaulted on its obligations and the buyers of its insurance - such as banks and other financial companies - would have found themselves without protection against losses on the debt they hold.

"It might not just bring down other financial institutions in the U.S. It could bring down overseas financial institutions," said Timothy Canova, a professor of international economic law at Chapman University School of Law. "If Lehman Brothers' failure could help trigger AIG's going down, who knows who AIG's failure could trigger next."

New York-based AIG operates an insurance and financial services businesses ranging from property, casualty, auto and life insurance to annuity and investment services. Those traditional insurance operations are considered healthy and the National Association of Insurance Commissioners said "they are solvent and have the capability to pay claims."

Presidential candidates John McCain and Barack Obama traded increasingly barbed insults along with prescriptions for the ailing economy yesterday, as financial fears shoved aside lipstick on pigs and every other political issue.

An ad by Democrat Obama sneered: "How can John McCain fix our economy if he doesn't understand it's broken?"

Republican McCain retorted: "Sen. Obama saw an economic crisis, and he's found a political opportunity. My friends, this is not a time for political opportunism; this is a time for leadership."

The verbal dueling showed the importance both candidates put on the issue of the economy as the continuing financial meltdown on Wall Street has driven all other issues out of the news. Both campaigns now believe that the candidate who manages to grab the issue and gain voters' confidence could be the next president. *