AIG Gets Up to $85 Billion Fed Loan; Cedes Control (Craig Torres, Hugh Son)

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Sept. 16 (Bloomberg) -- The U.S. government agreed to lend as much as $85 billion to American International Group Inc. in exchange for a 79.9 percent stake to save the country's biggest insurer from collapse.

The Federal Reserve ``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,'' the Fed said.

{xtypo_quote_right} AIG will replace management as part of the deal, said the person, who declined to be named because not all parts of the agreement were publicly disclosed. {/xtypo_quote_right}

The agreement, supported by the Treasury Department, will keep New York-based AIG in business, averting a failure that could have threatened more financial companies and added to chaos in world markets. Losses industrywide could have totaled $180 billion if AIG collapsed, according to RBC Capital Markets. AIG needed the loan after its credit ratings were cut and shares plunged 79 percent since Sept. 11.

The two-year loan will "assist AIG in meeting its obligations as they come due," the Fed said in its statement. The federal lifeline will allow AIG to sell assets in an orderly fashion rather than at distressed prices, said a person familiar with the agreement.