Fed to lend $85 billion to AIG, take 80 percent stake

WASHINGTON (Reuters) - The U.S. Federal Reserve Board on Tuesday said the Federal Reserve Bank of New York will lend up to $85 billion to the American International Group in a plan aimed at saving the insurer from a "disorderly failure" that could wreak economic havoc.

The Fed said under the two-year facility the U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto payment of dividends to common preferred shareholders in the deal, which has the full support of the Treasury Department.

"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," the Fed said in a statement.

The Fed said the loan, secured by all assets of AIG and its primary non-regulated subsidiaries, was designed to assist the insurance giant in meeting its obligations as they come due.

The 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 economy.

The loan is expected to be repaid from proceeds of the sale of the firm's assets.

U.S. Treasury Secretary Henry Paulson, in a separate statement, said that U.S. financial regulators were engaged in a broad effort to try to restore some stability to battered financial markets.

"We are working closely with the Federal Reserve, the SEC and other regulators to enhance the stability and orderliness of our financial markets and minimize the disruption to our economy," Paulson said in a brief statement of support for the Fed's action.

(Reporting by David Lawder and Glenn Somerville; Editing by Gary Hill)