Government Swoops In To Save AIG

WASHINGTON — For the second time this month, the U.S. government put taxpayer money on the hook to rescue a private financial company, saying the failure of the huge insurer American International Group Inc. would further disrupt markets and threaten the already fragile economy.The Federal Reserve said Tuesday it would provide up to $85 billion in an emergency, two-year loan to rescue AIG, which teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued. In return, the government will get a 79.9 percent stake in AIG and the right to remove senior management.The move was similar to government’s seizure on Sept. 7 of mortgage giants Fannie Mae and Freddie Mac, where the Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke.Both moves were bound to raise questions about the use of taxpayer money to bail out private firms.The Fed said it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy. Although little known off Wall Street, AIG does business with almost every financial institution in the world and insures $88 billion worth of assets including mortgages and corporate loans.Its failure could also “lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance,” the Fed said in a statement.The decision to help AIG marked a reversal from the government’s move over the weekend, when it refused to use taxpayer money to bail out Lehman Brothers Holdings Inc. Lehman, which filed for bankruptcy protection Monday, collapsed under the weight of mounting losses related to its real estate holdings.The White House said it backed the Fed’s decision Tuesday.