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Fed lends $85 billion to AIG

The Federal Reserve Board announced late Tuesday it would authorize the Federal Reserve Bank of New York to lend $85 billion to the American International Group (AIG) to save the insurance giant from failure.

The bailout is necessary: The ramifications of an AIG failure would be considerably more harmful to the economy than the $85 billion bailout pricetag, Fed officials say.

"The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance," according to a Tuesday night Fed statement. "The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy."

Under the plan, the federal government receives a 79.9% equity interest in AIG, including "all assets of AIG and of its primary non-regulated subsidiaries." The bailout plan has a 24-month term that will accrue interest. "AIG will be permitted to draw up to $85 billion under the facility," a Fed statement said Tuesday night.

The AIG board of directors expressed both relief and optimism after the Fed's $85 billion announcement Tuesday. With the federal help, AIG's status will return to full liquidity, according to a Tuesday night AIG statement.

"We believe the loan, which is backed by profitable, well-capitalized operating subsidiaries with substantial value, will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis," according to the statement. "We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets."

What's it mean to farmers? In addition to insurance policies and service, AIG provides loans and credit and investment services. With money invested in today's volatile grain markets, an AIG failure would have meant a flushing of the firm's money from the grain trade investment pool.

"Risk management, credit insurance and bonding play a large part of grain prices and basis. Unless things have changed, AIG is heavily involved," Agriculture Online Marketing Talk member Larry Weber said Tuesday prior to the Fed's AIG bailout announcement. "If they [go under], this won't be pretty. I don't think they realized how interconnected they were."

In the grain trade, officials took steps quickly to protect the marketplace from any losses directly tied to AIG's near-failure.

"CME Group took an emergency action today to facilitate the reduction of the positions of American International Group, Inc. (AIG) and its subsidiaries and to protect the orderly functioning of the market," according to a CME statement Wednesday morning. "The agreed-upon order permits the limited execution of block trades by AIG in certain CME and CBOT commodity futures products, including soybeans, soybean oil, corn, wheat, live cattle and lean hogs, for the purpose of liquidating a portion of AIG's open positions."

The AIG buyout will cause a release of the pressure in the grains, says Grainanalyst.com floor trader and market analyst Vic Lespinasse, but that's not to say there's some instability surrounding AIG's previous holdings in the trade.

"All the turmoil in the financial markets seems to have subsided a bit overnight with the Fed agreeing to bail out AIG. This should take a lot of pressure off the grain market," Lespinasse says. "Of course, the situation is fluid and any change could cause a significant reaction in all the markets so traders need to be watchful."

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The Federal Reserve Board announced late Tuesday it would authorize the Federal Reserve Bank of New York to lend $85 billion to the American International Group (AIG) to save the insurance giant from failure.

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