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NY state throws $20bn lifeline to insurer (The Irish Times)

04 November 2011

AIG Funding Crisis:US Authorities were yesterday fighting a fresh fire in the crisis on Wall Street, throwing a $20 billion (€14 billion) lifeline to AIG, one of the world's largest insurers, just hours after the collapse of Lehman Brothers, and Bank of America's $50 billion (€35 billion) rescue takeover of Merrill Lynch.

The deal between AIG and New York state insurance regulators allows the company to access $20 billion of capital from its own subsidiaries in a desperate attempt to stave off a liquidity crisis and credit downgrades.

The move came as fears over the financial health of AIG, which employs about 400 staff in Dublin and insures some of Ireland's biggest companies, sent its shares into a tailspin. The stock fell as much as 70 per cent in trading yesterday morning and was 47 per cent lower in the afternoon.

The move, announced by New York governor David Paterson, is designed to give AIG, whose balance sheet has been savaged by billions of dollars in writedowns and credit losses, time to clinch a deal to raise capital through sales of shares and assets. Last night the Wall Street Journal reported that Goldman Sachs and JP Morgan Chase had been asked by the Federal Reserve to make loans of $70-75 billion available to the troubled insurer, citing anonymous sources that were said to have knowledge of the situation.

AIG has posted losses totalling $18 billion on guarantees it wrote on mortgage-linked securities.

Mr Paterson said he had worked with AIG in a bid to help save 14,600 jobs in New York city and state. He also said the plan was carefully crafted to pose no risk to New York taxpayers.

AIG and its advisers spent the weekend hammering out plans to raise up to $40 billion in capital, which the insurer needs to shore up its balance sheet and prevent crippling ratings downgrades.

The US Federal Reserve battled to contain a ferocious storm in the overnight borrowing market as financial institutions rushed for cash, pushing up the actual Fed funds rate at one point to about 6 per cent - triple its target rate.

The US central bank unleashed $20 billion and then another $50 billion in overnight liquidity, in an effort to bring down the inter-bank borrowing rate at which banks lend money to one another.

The turmoil raised speculation that the Fed could cut interest rates today, though it appeared more likely that it would say it is monitoring developments and will act "as needed" to ensure stability.

Earlier the European Central Bank and Bank of England together poured about €36 billion in liquidity into their own money markets in a bid to contain the hunger for cash unleashed by the failure of Lehman Brothers and wider upheavals on Wall Street.

The US central bank is putting pressure on weak financial institutions to strengthen their positions, if necessary by accepting takeover.