The US Federal Reserve Board has announced it will lend as much as $US85 billion ($105.6 billion) to save the world’s largest insurer, American International Group, from collapse. In return the US Government will take a 79.9% stake in the company.

In a deal announced a few hours ago, the Federal Reserve Bank of New York has been authorised to extend AIG up to $US85 billion in credit, which will be available for up to two years at an interest rate of 11.3%.

The decision to go ahead with the deal followed the move by the major ratings agencies to downgrade AIG’s rating as it struggled with crippling losses brought about by its activities in the credit default swaps and from its subprime mortgage-backed securities holdings.

With listed banks unwilling to bail the company out, the Fed came to the conclusion that ignoring AIG’s plight would have led to massive problems in global financial markets.

“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 loan will give AIG the breathing space to offload businesses with what the Fed called “the least possible disruption to the overall economy”. The loan is backed by AIG’s assets, and is expected to be repaid from the proceeds of the asset sales.

Treasury Secretary Henry Paulson says he supports the efforts of government agencies “to enhance the stability and orderliness of our financial markets and minimise the disruption to our economy”.

The collapse of the massive subprime market has crippled AIG, which has lost more than $US18 billion ($22.4 billion) in the past nine months. Its share value has fallen more than 91% since January.

Read earlier articles about this at Breaking News.