In the first hour of trading on Wall Street on Wednesday, stocks plummeted again, with the Dow Jones index losing more than 200 points, indicating a continuation of uncertainty in the financial system, despite the government taking over the struggling insurance giant American International Group (AIG) with an $85 billion loan.
The day after Wall Street somewhat recovered from the steep decline on Monday, the Dow Jones fell by 219.54 points, or 2.0 percent, to 10,838.13 points in the first hour of trading on the NYSE. The broader Standard & Poor’s index also sharply fell by 26.10 points, or 2.15 percent, to 1,187.50 points. The technology index Nasdaq composite dropped by 43.11 points, or 1.95 percent, to 2,164.79 points. The American central bank – the Federal Reserve (FED), provided AIG with a two-year loan of $85 billion in exchange for nearly 80 percent of its shares, executing the nationalization of one of the central institutions in a crisis that has spread across financial markets this month. Due to billions of dollars in losses on investments and insuring investments in securities backed by mortgage loans, AIG found itself on the brink of bankruptcy immediately after the liquidation of the investment bank Lehman Brothers. When credit rating agencies downgraded its credit rating on Monday, AIG suddenly found itself in a situation where it had to pay $14.5 billion of its obligations. Had the company failed to do so, it could have triggered a ‘domino effect’ of losses throughout the global financial system, The Washington Post wrote on Wednesday.
The business daily The Wall Street Journal reports that the agreement, reached after tough negotiations on the night from Tuesday to Wednesday, stipulates that the FED will lend $85 billion to AIG in exchange for 79.9 percent of the insurer’s stock as collateral. The two-year loan will have an interest rate of Libor plus 8.5 percent (Libor is the common short-term lending rate among banks). The loan is secured by AIG’s assets, including its profitable insurance business, which provides the FED with some protection even if the markets continue to decline. If AIG recovers, taxpayers can expect a profit through the government’s stake in the shares, WSJ adds. After filing for bankruptcy on Monday, the investment bank Lehman Brothers sold its banking operations in North America and its brokerage operations to Barclays, the third-largest British bank, for the low price of $250 million.
