Federal Reserve Steps In To Save AIG
Authorities stepped in overnight to stave off what would have been the biggest corporate bankruptcy ever. The Fed offered American International Group Inc (AIG), the world’s largest insurance company, $85 billion in exchange for an 80% stake in the ailing firm. Analysts have estimated that an AIG collapse would cost the financial system about $180 billion dollars, half of the capital they have raised since the beginning of the credit crunch. Stock markets welcomed the news: US index futures rallied in after-hours trading and Japan’s benchmark Nikkei stock index added 2.1%.
Forex traders have seen blistering volatility since the beginning of the week when number-four US investment bank Lehman Brothers declared bankruptcy while Merrill Lynch had to sell out to Bank of America. Lehman’s downfall was quickly followed by news that AIG approached the US Federal Reserve for a bridge loan to avoid implosion. The company suffered $18 billion in loses over the past three quarters on loses from mortgage-linked securities. As we suggested earlier this week, the turmoil has benefitted the US dollar as investors cashed out of risky assets, taking to the sidelines until the dust has settled. Indeed, the US Dollar Index added 1.3% in yesterday. The exodus has seen trading volumes shrivel, sapping liquidity and raising transaction costs (trading spreads, overnight borrowing rates).