The Federal Reserve Bank of New York announced it would lend up to $85 billion to the American International Group late Tuesday night.
The Fed said in a press release that the "terms and conditions (are) designed to protect the interests of the U.S. government and taxpayers."
The release said without the bail out, the fall of AIG could lead to market fragility and high borrowing costs.
"This 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 overall economy," read the report.
The loan is expected to be repaid with the proceeds from the sale of AIG's assets, and the U.S. government will receive a 79.9% equity interest in AIG.
Following the release, Treasury secretary Henry Paulson said he supports the move, and that in this challenging time for capital markets the funding will "mitigate broader disruptions."
By Megan Ainscow
©CEP News Ltd. 2008