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FED rescues AIG, Barclays buys Lehman U.S. unit

U.S. authorities engineered an USD 85 bln rescue of insurance giant American International Group Inc, staving off bankruptcy and bringing a measure of calm to shell-shocked global markets. The bailout, made amid a cataclysmic week for the financial sector, marks a reversal of Washington's vow not to step in and calls for the U.S. Federal Reserve to lend up to USD 85 bln to AIG for two years in exchange for a 79.9 per cent equity stake.It came just two days after U.S. authorities refused to rescue investment bank Lehman Brothers Holdings Inc, forcing it into bankruptcy court despite pleas from Wall Street's chiefs. AIG's lifeline bought time for investors to digest an unprecedented run of events that has altered the shape of Wall Street, but did little ease a funding squeeze caused by the turmoil.

"Thank God," exclaimed Daniel Fuss, an influential bond manager who oversees more than USD 100 bln at Loomis, Sayles & Co in Boston. "AIG is interwoven with so many people and touches many companies around the world. This is a huge relief to many parts of the financial markets." The Fed stepped in amid worries that a collapse of AIG could cause far-reaching damage to the global financial system, although some market players argued that the government's move brings just a short-term respite and could do long-term harm. European shares rose in early trade on Wednesday with banking stocks rebounding following hefty losses in the previous two sessions as AIG got an emergency rescue package from the Federal Reserve. "European financials should rally based on what the Federal Reserve did last night to rescue AIG. It looks like a better deal than expected," said Bernard McAlinden, market strategist at NCB Stockbrokers. Meanwhile the UK's biggest mortgage lender HBOS Plc and Lloyds TSB contemplated a merger which would reshape British banking. Shares in Britain's HBOS Plc were initially sharply lower for a sixth consecutive day on Wednesday, but recovered after a source familiar with the matter confirmed a reprt that it was in merger talks with Lloyds TSB. Also, oil rebounded yesterday after the USD 85 bln U.S. government rescue of insurer American International Group appeared to reassure global financial markets. U.S. light crude for October delivery was up USD 2.70 at USD 93.85 a barrel at 1044 GMT after a session high of USD 95.00.

"I think it was a flight of capital out of the futures markets and now we are coming back to fundamentals," said Simon Wardell of Global Insight in London. "I think a lot of that (investor) cash is out of commodities and will stay out," said Wardell. "We've had outages in the Gulf of Mexico, and I think a lot of that was overlooked," he said. Oil is down by more than a third from a record peak of USD 147.27 on July 11, partly due to a reduction in demand from top energy consumer the United States, where economic growth is flagging. The fall accelerated this week because of financial market fallout from the collapse of Lehman and AIG's troubles.

"Everyone feared there would be a big meltdown in the financial sector that would affect the economy. Now they are hoping we'll just get through the AIG situation and that may be lifting the market," said Anthony Nunan, a risk management executive at Tokyo-based Mitsubishi Corp. AIG's problems and Lehman Brothers' bankruptcy had triggered an investor flight to safe haven assets such as government bonds and gold. Gold climbed on Wednesday in line with a relief rally across the commodities spectrum after the rescue of AIG.

 

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Tags: after financial rescue lehman

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