NEW YORK (Reuters) - The U.S. government agreed to rescue insurer American International Group with an $85 billion loan from the New York Federal Reserve to stave off a bankruptcy that would have thrown world markets back into turmoil.
* The U.S. Federal Reserve will extend AIG $85 billion in exchange for a nearly 80 percent stake to bail it out, the Fed said in a statement.
* The deal averts the largest corporate bankruptcy ever.
LIM TAE-GEUN, MARKET ANALYST, DAEWOO SECURITIES, SEOUL
“Shares are recouping yesterday’s massive losses and it also helped that the U.S. government is seen providing lifeline to AIG.
“Eyes are on U.S. financial markets as investors continue to be concerned about its ripple effects to the real economy and higher risk premium on emerging markets. Stocks are cheap, but investors are waiting for the signs of some sort of stability on Wall Street.”
CALLUM HENDERSON, CHIEF CURRENCY STRATEGIST AT STANDARD CHARTERED BANK, SINGAPORE:
“Markets are trying to find a floor given the latest events and headlines out of the US, which may help to support sentiment if they accurate.
“Asian equity markets are generally higher on the back of the slightly stronger close to the Dow. In line with this, many Asian currencies have come off their lows.
“The bigger question is whether or not this will change the economic outlook for Asia - and the answer to that is clearly no. So any rally in Asian currencies is going to be temporary and the more important level is going to be at what level do you sell them?”
KOICHI HAJI, CHIEF ECONOMIST, NLI RESEARCH INSTITUTE
“Rescuing AIG itself is a good thing, but we’re seeing a double-standard here. Why is the Fed helping AIG but not Lehman? Unless U.S. authorities come up with a clear standard on who to help and who not to, market unrest will continue.
“Investors are becoming very risk-averse. They don’t want to get into trouble. We’ll likely see market turbulence for some time. Japanese investors will continue repatriating money from abroad.
“The biggest worry for Japan’s economy is a possible surge in the yen, or a sharp dollar decline. If confidence in the dollar erodes, we might see the dollar plunge and once that happens, it’s hard to control it. A joint currency intervention by the United States, Japan and euro zone to stem dollar falls then becomes a possibility.”
TAKAO HATTORI, SENIOR INVESTMENT STRATEGIST, MITSUBISHI UFJ SECURITIES
“There is still doubt about how soon markets will stabilize... The flames surrounding securities firms leapt across to an insurer. But if they can avoid a crisis, the move could lead to a certain level of market stability.
“Still, I think the problem in U.S. financial markets will likely stay for a while.”
AKITO FUKUNAGA, FIXED INCOME STRATEGIST, CREDIT SUISSE, TOKYO:
“This removes the near-term risk of a collapse (of AIG) and is a negative factor for bonds.
“But when taking a more longer term view, it is not as if a recovery in the global economic cycle is coming into sight. While worries about the financial system may abate for now, the weakness of the real economy still lies at the root. “So I do not think this will lead to endless buying of equities or of selling of bonds.”
JUNKO NISHIOKA, ECONOMIST, RBS SECURITIES, TOKYO
“The entity in question is a large insurer and the decision reflects expectations that such an institution should not be allowed to fail.
But uncertainty towards the financial sector is likely to remain and continue to expose the markets to downside risks.
That said, the Federal Reserve has shown that it is willing to go to great lengths. Its decision to stand pat on monetary policy yesterday reflects such a stance as the current financial crisis cannot be solved by shifting interest rates.”
YASUNARI UENO, CHIEF MARKET ECONOMIST, MIZUHO SECURITIES, TOKYO
“If the Federal Reserve is to provide support to AIG, that would give a sense of security to investors, boosting share prices while prompting a sell-off of bonds, even if it doesn’t cost taxpayers money.
“Following the case of Lehman Brothers, I think the U.S. authorities will likely provide some safety net but the question will be how far the Fed could shoulder the risk of losses or whether it would only take stop-gap measures.
“If Fed doesn’t provide a rescue, stock prices will plunge and bond prices will ascend ... It will be a total mess.”
MASARU HAMASAKI, SENIOR STRATEGIST AT TOYOTA ASSET MANAGEMENT, TOKYO
“The news is a relief, putting a stop to the worsening situation for now.
“Insurers have their own assets unlike brokers, and if they went bankrupt and had to liquidate their assets, which are immense, the impact could have destroyed the market.”
PETER HILTON, HEAD OF ASIA EQUITY RESEARCH, ROYAL BANK OF SCOTLAND, HONG KONG:
“You will probably see some relief today because there were calls going into affiliate offices in Asia and people were a bit worried about their effective savings. So relieving that pressure helps some.
“I expect the markets will be a bit better today but that’s after a very rough period.”
CHRIS ORNDORFF, MANAGING PRINCIPAL, PAYDEN & RYGEL INVESTMENT MANAGEMENT, LOS ANGELES:
“The Federal Reserve obviously thought the systemic risk from a major insurance company was too great to let go. Remember, AIG not only does major business with Wall Street and the financial markets but also Main Street,” said Orndorff, whose funds hold both AIG shares and bonds. “That is why the Fed stepped in. It would have been disruptive, in no uncertain terms, if AIG went bankrupt.”
DAN FUSS, VICE CHAIRMAN, LOOMIS SAYLES, BOSTON:
“Thank God! AIG is interwoven with so many people and touches many companies around the world. If AIG had gone belly up, you would have an unknown, humongous number of default swaps cut off. What would that lead to? We were already approaching some market disruption. The credit markets in the U.S. were frozen this morning. The liquidity in the corporate bond market, not junk bonds but investment grade, was zero. This is a huge relief to many parts of the financial markets.”
STOCKS: U.S. equity index futures rose, pointing to gains for Wall Street come Wednesday morning. Stocks in Asia rose as well. BONDS: U.S. Treasuries dropped in Asian trading as a flight-to-safety bid that had powered their recent rally faded.
CURRENCIES: The dollar pushed higher against the yen.
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