US govt rushes in to rescue aig for 85 bn

AIG8217;s chief executive, Robert Willumstad, is expected to be replaced by Edward Liddy, the former head of insurer Allstate Corp., according to The Wall Street Journal, citing a person it did not name. Willumstad had been at the helm of AIG since June.

It was the second time this month the feds put taxpayer money on the hook to rescue a private financial company, saying its failure would further disrupt markets and threaten the already fragile economy. AIG said it would repay the money in full with proceeds from the sales of some of its assets. It will be up to the company to decide which assets to sell and the timing. The government does, however, have veto power.

Under the deal, the Federal Reserve will provide a two-year 85 billion emergency loan at an interest rate of about 11.5 per cent to 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 per cent stake in AIG and the right to remove senior management. AIG shares sank 1.34, or 36 per cent, to 2.41 in morning trading Wednesday. They traded as high as 70.13 in the past year. The government8217;s move was similar to its bailout of September 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.

The Fed said it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.

It also could 8220;lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance,8221; the Fed said in a statement. The decision to help AIG marked a reversal for the government from 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 Fed8217;s decision Tuesday. 8220;These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy,8221; White House spokesman Tony Fratto said.

After meeting with Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke in a late-night briefing on Capitol Hill, Congressional leaders said they understood the need for the bailout.8220;The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times. Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse,8221; said Senator Charles Schumer.

TROUBLED HBOS in talks to be bought by Lloyds TSB

Troubled British bank HBOS, the country8217;s biggest home loan provider, said Wednesday it was in advanced talks that could lead to a takeover offer by its domestic rival Lloyds TSB. The move would create a British retail banking giant and would almost certainly end speculation about the financial strength of HBOS, which has seen its share price fluctuate wildly this week. Reports said the British government would waive competition rules to allow the deal to go through.

Storm swirls around Wamu, hunt on for buyer

US officials are fiercely putting out a series of economic fires with all eyes now focused on the fate of Washington Mutual after AIG became the latest company to be thrown a lifeline. US banking regulators are actively searching for a candidate to take over the Seattle, Washington-based bank amid fears it could be the next to be felled by the economic maelstrom. Washington Mutual, the country8217;s largest savings and loan, is now seen as one of the firms the most exposed to the current mortgage crisis sweeping the ailing housing sector.

Morgan and Goldman plunge as fears rise

Anxious investors continued to hack away at Morgan Stanley and Goldman Sachs Group Inc on Wednesday, sending the two largest investment banks8217; shares lower and boosting default-insurance prices higher amid lingering worries about their ability to remain independent. Morgan Stanley8217;s shares sank 40 per cent below the depths reached during the Asia debt crisis a decade ago. Goldman stock plummeted 22 per cent to a three-year low. Investors also bid up the price of protecting against a default in debt issued by the banks, indicating growing concern that Wall Street8217;s biggest firms are in jeopardy.

Barclays may acquire more of Lehman Brothers

Barclays PLC said on Wednesday it might pick up some of Lehman Brothers assets and employees in Europe and Asia, on top of the British bank8217;s deal to acquire key US operations from the failed investment bank. 8220;Options, not obligations,8221; Group chief executive John Varley said of the possibility of salvaging more of Lehman businesses.