Overview: Yesterday night the Federal Reserve announced a USD85bn lending facility to AIG. At the same time the US Government is set to take a 79.9% equity stake in AIG. AIG has experienced deep trouble following losses on its holdings of various structured credit with mortgage exposure, sale of CDS protection and holdings of RMBS (see Research: The financial crisis - what's next?). The intervention removes a major uncertainty for the financial markets and is thus positive for credit and equities while bearish for bonds. However, the financial system is still under severe stress and we believe US authorities will be hesitant to bail out more institutions unless they are of a similar magnitude to AIG.
Details: With the full support of the US Treasury, the Federal Reserve Bank of New York has been authorised to lend up to USD85bn to American International Group (AIG). The secured loan has terms and conditions designed to protect the interests of the US government and taxpayers.
The reason was that a failure of AIG could add to already significant levels of financial market fragility and have systemic consequences, which could spill over into the real economy.
