Governor David Paterson announced Tuesday night that the federal government’s will give an unprecedented $85 billion loan to the nation’s largest insurer.
In a press conference, the governor said that American International Group will repay the revolving loan within two years, and that individuals’ insurance policies and jobs will be unaffected.
In return, the Fed will take an almost 80-percent stake in the company.
“This is good news for New York and great news for policy holders and employees around the world,” said Paterson. “Through a reorganization and further action, jobs will be saved, businesses will remain stable and certainly our financial recovery will be easier if not sooner.”
He said that the state will continue to play a supervisory role in the disbursement of AIG's businesses and in protecting local policy holders. The insurer turned down the state's Monday offer of $20 billion of New York's assets to fund day-to-day operations.
State Insurance Superintendent Eric Dinallo said the loan helped further disaster with the insurance company.
"The company could have sold some of these assets, but the pricing would have been wholly insufficient versus where the true value was," said Dinallo. "And so what the federal government has done here is given them a lot of time."
Explaining the decision, Fed officials said in a statement, "a disorderly failure of AIG could add to already significant levels of financial market fragility."
The Associated Press said Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke met with members of Congress on Tuesday to brief them on the situation and to try to save the company.
Shares of AIG have been falling sharply ever since it announced it was seeking emergency capital.
"The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times," said New York Senator Charles Schumer. "Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse."
AIG set up a hotline for insurance holders, at 1-800-339-1759, operating Monday-Friday from 9 a.m. to 8 p.m.
As the Dow Jones rose 141 points Tuesday after the previous day's historic 500-point drop and a major shake-up of Wall Street, British bank Barclays announced a deal to buy a portion of bankrupt Lehman Brothers.
The move by Barclays to buy Lehman, which filed for Chapter 11 bankruptcy yesterday, could save thousands of jobs.
Under the deal, Barclays would reportedly pay just under $250 million for the company's North American investment banking and trading operations.
Reportedly, Barclays agreed to buy Lehman's headquarters in Midtown Manhattan and New Jersey for about $1.5 billion and retain as many as 10,000 jobs.
This weekend, Barclays withdrew from talks to buy all of Lehman.
The financial crisis has taken a toll on the state's pension fund, but State Comptroller Tom DiNapoli said the fund remains fundamentally sound.
DiNapoli's office said the state Common Retirement Fund held five million Lehman shares on Monday. But officials say that represents only a small part of the fund which reported assets of $153 billion in March.
"We don't place all of our eggs in one basket," said DiNapoli. "The fund is well-diversified across multiple asset classes, investment types, markets and industries."
Despite the market’s turmoil, the Fed's Open Market Committee decided to hold interest rates steady at 2 percent Tuesday.
The central bank said it made its decision based on worries of inflation.
However, in an effort to increase confidence in the marketplace and spur lending, the Fed put another $70 billion into the system.
Central banks from Tokyo to Frankfurt also injected more than $160 billion into their financial systems in an effort to calm markets.
One financial observer said the situation is far from stable.
"Whatever happens is truly a domino affect,” said Dr. Michael William, dean of Truro College Graduate School. “And that’s where when you see the dominoes going from WaMu all the way through today- today in markets already in Asia are being hit again. We're in for another third day maybe a fourth day maybe a fifth day of the downturn."
Yesterday, investment firm Merrill Lynch was forced to sell to Bank of America. There was also a 504-point slide of The Dow Jones Industrial Average, the lowest drop since the September 11th terrorist attacks.
About $700 billion evaporated from retirement accounts, government pension funds and other investment portfolios.
The recent events seem to have many on edge, especially those who work in the financial sector. But many of those who spoke to NY1 said they were confident the situation would turn around.
"It's devastating but we've been through this before," said one Wall Street employee. "I've been doing this for 39 years. I've seen good times. I've seen bad times. It'll come back."
"I actually work for Merrill Lynch, and I had gotten laid off back in the end of April," said another New Yorker. "You make the best of it. You get out there, there are jobs; you just got to look for them."
Local businesses say they would suffer greatly from the elimination of Lehman Brothers, and hope that a deal is worked out.
"It's going to affect us, greatly," said Nick Athanasatos, owner of Majestic Deli & Cafe. "They are very good customers. They are half of our breakfast crowd. In the nighttime, they keep us going. The whole community is going to be affected because they do a lot for the community, as well."
Meanwhile, the Federal Reserve announced today that it will hold the interest rates steady at 2 percent – rebuffing calls to cut the rate to ease market jitters.
The central bank said it made its decision based on worries of inflation.
However, in an effort to increase confidence in the marketplace and spur lending, the Federal Reserve is pumping another $70 billion into the system. Central banks from Tokyo, Japan to Frankfurt, Germany have also injected more than $160 billion into their financial systems in an effort to calm markets.
The feds move comes as Goldman Sachs reports its worst slump since going public in 1999.
The investment bank says its third-quarter profits dropped 71 percent from a year ago, to $810 million. That's down from $2.8 billion last year.
Mayor Michael Bloomberg tried to reassure New Yorkers Monday that the city is well-positioned to deal with the turmoil on Wall Street.
But the mayor also made it clear he thinks the financial services business has to clean up its act.
"Our financial system cannot continue to stand this game of speculators preying on the weak firms, and trying to destroy them for profit," said Bloomberg. "There will always be a weakest firm, by definition, there must be. But we have to understand that our country's future is connected to our ability to work together, instead of trying to tear each other down."
Employment on Wall Street is particular critical to the health of the economy in New York because of the huge paychecks common in the industry. Two to three other jobs are created in the city from the spending that goes along with each Wall Street job.