New Delhi: The US Federal Reserve may have plans to bail out AIG, but it has decided not to lower key lending rates.
The central bank held onto its base lending rate of 2 per cent, saying the economy is expected to achieve moderate growth - despite the current financial crisis. There had been calls for the Fed to lower rates to help settle the markets after Lehman Brothers declared bankruptcy and the Merrill Lynch sale.
However, the Fed says the already low rates and steps it has taken to ease funding strains, should help to promote growth over time.
Stocks on Wall Street fell after the Fed's decision, but later pared losses following reports that the Central Bank may bail out AIG. However, shareholders would be severely diluted by the bailout.
The Dow Jones industrial average rose by over 140 points and closed at 11,059. The Nasdaq was up 28 points to close at just over 2,200. Standard & Poor's 500 Index gained nearly 21 points to close at 1,213.
AIG has been scrambling to raise capital to stay afloat, after being hit by the credit crunch.
The government had earlier resisted getting involved, hoping to entice Wall Street to set up a $75 billion rescue fund for the firm.
On Tuesday, however, AIG shares had fallen by nearly 70 per cent though the insurer said that its life insurance, general insurance and retirement services businesses are operating normally.
In this situation, if the government had not acted, it would have roiled world markets since AIG has $1.1 trillion in assets and 74 million clients in 130 countries.
New York State officials, who regulate the insurance titan, urged the federal government to rescue AIG.
"I don't think this country, with all we've been through right now, where our economy is, can afford it," New York Governor David Paterson told CNN.
The state attempted to help AIG on Monday by allowing it to tap into $20 billion in assets from its subsidiaries if the company could comes up with a comprehensive plan to get the much-needed capital, said a state Insurance Department spokesman.
Paterson said AIG could transfer $20 billion in assets from its subsidiaries to use as collateral for daily operations. In exchange, the parent company would give the subsidiaries less-liquid assets of the same value. He stressed the company is financially sound and that no taxpayer dollars are involved.
If AIG were to fail, the global ripple effects would be unprecedented, Managing Director at Mendon Capital Advisors Corp, Robert Bolton said. AIG is a major player in the credit default swaps market, an insurance-like contracts that guarantee against a company defaulting on its debt. Also, it is a huge provider of life insurance, property and casualty insurance and annuities.
AIG has had a very tough year. Rocked by the subprime crisis, the company has lost more than $18 billion in the past nine months and has seen its stock price fall more than 91 per cent so far this year. It already raised $20 billion in fresh capital earlier this year.
Its troubles stem from its sales of credit default swaps and from its subprime mortgage-backed securities holdings.
AIG has written down the value of the credit default swaps by $14.7 billion, pretax, in the first two quarters of this year, and has had to write down the value of its mortgage-backed securities as the housing market soured.
The insurer could be forced to immediately come up with $18 billion to support its credit swap business if its ratings fall by as little as one notch, wrote John Hall, an analyst at Wachovia, on Monday.
This year's results have also included $12.2 billion in pretax writedowns, primarily because of "severe, rapid declines" in certain mortgage-backed securities and other investments.
The company brought in new management to try to turn the company around. In June, the company tossed out its chief executive, Martin Sullivan and named AIG chairman Robert Willumstad, who joined AIG in 2006 after serving as president and chief operating officer of Citigroup.
There is also some hope for the bankrupt investment bank Lehman Brothers. British banking major Barclays has announced that it is interested in acquiring assets of the company.
Barclays had been engaged in negotiations about a possible takeover of Lehman Brothers but had pulled out on Sunday, following which the latter filed for bankruptcy.
But now Barclays says it is discussing the possibility of acquiring some of Lehman assets.
The comment followed a report in the Wall Street Journal that Barclays was looking to take over Lehman Brothers' core businesses in the United States - share and bond underwriting, merger advice and securities trading.
It may also take over Lehman's European operations based in London. But Financial Times says Barclays may not acquire Neuberger Berman, Lehman's asset management business. (With inputs from CNN)
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