US Fed rescues AIG

US authorities engineered an $85 billion rescue of insurance giant American International Group Inc, staving off bankruptcy and bringing a measure of calm to shell-shocked global markets.

The bailout, made amid a cataclysmic week for the financial sector, marks a reversal of Washington's vow not to step in and calls for the US Federal Reserve to lend up to $85 billion to AIG for two years in exchange for a 79.9 per cent equity stake.

It came just two days after US authorities refused to rescue investment bank Lehman Brothers Holdings Inc, forcing it into bankruptcy court despite pleas from Wall Street's chiefs.

AIG's lifeline bought time for investors to digest an unprecedented run of events that has altered the shape of Wall Street, but did little to ease a funding squeeze caused by the turmoil.

"Thank God," exclaimed Daniel Fuss, an influential bond manager who oversees more than $100 billion at Loomis, Sayles & Co in Boston.

"AIG is interwoven with so many people and touches many companies around the world. This is a huge relief to many parts of the financial markets."

The Fed stepped in amid worries that a collapse of AIG could cause far-reaching damage to the global financial system, although some market players argued that the government's move brings just a short-term respite and could do long-term harm.

Around the time the AIG deal was announced, British bank Barclays plc gave Wall Street another boost: It agreed to buy several parts of Lehman, the Wall Street investment bank that went bankrupt on Monday, for $1.75 billion.

The AIG deal overshadowed a Fed decision earlier on Tuesday to hold its benchmark interest rates steady despite market's counting on an economy-boosting cut in borrowing costs.

Critics said that the Fed may have wiped out what credibility it won resisting Lehman's rescue pleas and may have opened the door to countless other companies to come calling for help.

Barclays' purchase includes Lehman's North American sales, trading, and research and investment banking businesses, as well as its midtown Manhattan headquarters and two data centers.

About 10,000 of Lehman's 26,000 employees would join Barclays.