Fed will lend $85 billion to rescue AIG

By Charley Blaine and Elizabeth Strott

Stocks will likely open slightly lower this morning, despite an emergency move last night by the Federal Reserve to an $85 billion rescue of insurance giant American International Group (AIG, news, msgs).

Futures trading suggests that the Dow Jones industrials will open down 16 points. The Standard & Poor's 500 Index looks to start the day lower by 5 points, and the Nasdaq Composite Index futures were lower by 6 points.

The central bank announced Tuesday night that it had agreed to the loan package for the world's largest insurance company. In exchange, the Fed would become an 80% owner in company.

The New York Times called the Fed's decision "the most radical intervention in private business in the Fed's history." It was also necessary, Princeton University economist Uwe Reinhardt told The Times. "The spillover effects could have been incredible."

The loan is to be repaid from the sale of AIG assets, all of which would be pledged as collateral. AIG had $1 trillion in assets at the end of the second quarter.

The money won't be cheap. The Fed said it is charging the three-month London interbank offered rate (LIBOR) plus 8.5 percentage points. Based on today's LIBOR quote of 2.81%, that would be a rate of 11.31%.

By contrast, the national rate on a 30-year fixed-rate mortgage today, Bankrate.com said, was 5.72%.

News that a deal may be worked out came at the end of a hectic day that saw stocks rebound from a big loss early in the session. The Dow finished the day up 142 points to 11,059 after falling 504 points on Monday. Those gains came after the Fed decided to leave its key interest rates unchanged.

In addition to the Dow's gain, the Standard & Poor's 500 index was up 21 points, or 1.8%, to 1,214, and the Nasdaq Composite Index added 28 points, or 1.3%, to 2,208.

The Fed's decision -- made with the full support of the Treasury Department -- was another concession that some financial companies are too big to fail.

Originally, the central bank did not want to participate in an AIG rescue after it had declined to provide assistance to investment bank Lehman Bros. (LEH, news, msgs), which filed for bankruptcy protection on Monday.

But Wall Street financiers said they didn't have time to put together a $75 billion rescue package before AIG would be forced to seek bankruptcy protection. Moreover, the government was pressured by New York Gov. David Paterson, who said an AIG collapse would threaten the insurance coverage of thousands of policy holders and the retirements of customers who had bought AIG annuities.

Without the Fed's involvement, many news reports said, a bankruptcy filing could have come as early as Wednesday.

That would have threatened much of the world's credit system, which has been stressed for more than a year when the subprime mortgage problem metastasized into a global crisis.

AIG shares had fallen 21% to $3.75 in regular trading and an additional 42% to $2.16 in after-hours trading. With the Fed's rescue, common shareholders will see their holdings lose most of their value. AIG shares have fallen 93% this year. The stock has been sliding since peaking at $103.69 in December 2000.

The rationale for the rescue: AIG's enormous size and reach.

Through various subsidiaries, the company is a leading supplier of life, auto, homeowners, marine, airplane and business insurance in the United States. In California, CNBC's Jane Wells reported today, it is the largest supplier of workman's compensation insurance in California. It insures 1.6 million cars and motorcycles.

It has similar businesses in more than 100 countries.

The Fed's dramatic decision is part of a series of historic moves made by the Fed or the Treasury Department to try to save the nation's financial system from collapsing from the fallout of the subprime mortgage crisis and the worst housing slump since World War II.

In March, the Fed assisted JPMorgan Chase (JPM, news, msgs) in its takeover of investment bank Bear Stearns. On Sept. 7, the Treasury Department seized control of Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs), the nation's largest suppliers of mortgage capital. Both had been battered by big losses on mortgage investments.

The government let investment bank Lehman Bros. fail; it filed for bankruptcy protection on Monday. Merrill Lynch (MER, news, msgs) agreed to sell out to Bank of America (BAC, news, msgs) rather than suffer Lehman's fate.

Markets rally as traders see the Fed decision coming

The market moved higher not so much because investors liked the Fed's decision on interest rates. Many investors had hoped the Fed would cut its key federal funds rate and discount rate. The announcement, in fact, was greeted with boos on the floor of the New York Stock Exchange, and the Dow promptly fell to a loss of 131 points.

But the real reason for the rebound was that traders believed news reports indicating the Fed had started to change its position about helping AIG.

The Fed is still worried about inflation, but the central bank's statement said that risks to growth are of "significant concern." Wall Street took that to mean that the Fed would continue to pump money into the banking system and make other moves to ensure that the credit system doesn't seize up.

• Top stocks blog: Sugar daddy, the Fed's new role: Sugar daddy

Energy prices -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$91.15	$95.71	-$4.56	-21.05%	-5.03%
Heating oil (per gallon)	$2.7197	$2.7912	-$0.0715	-14.53%	2.65%
Natural gas (per million BTU)	$7.3270	$7.3740	-$0.0470	-7.76%	-2.08%
Unleaded gasoline (per gallon)	$2.4300	$2.5614	-$0.1314	-19.27%	-2.44%

Oil's big fall slams stocks in Russia

The financial crisis completely overwhelmed what looks like a collapse in oil prices that forced Russia's MICEX stock exchange to suspend trading this afternoon because of the worst one-day fall in 10 years.

Crude oil briefly dropped below $91, before closing at $91.15 a barrel, down 4.6% 5% from Monday and down 10% since Friday. Crude has been falling apparently in reaction to the problems with the financial system. Energy stocks were lower.

Eighteen of the 30 Dow stocks were higher on the day, along with 345 S&P stocks and 72 Nasdaq-100 ($NDX.X) stocks. The index, which tracks the largest Nasdaq stocks, was up 19 points, or 1.1%, to 1,724.

Bank of America, up 11.3% to $29.55, and JPMorgan Chase, up 10.1% to $40.74, were the Dow leaders.

Financial stocks see gains

Financial stocks had been the market leaders because investors were betting that the central bank would cut rates.

In addition, short sellers were covering their positions in financial stocks, giving that group an additional boost. The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund was up 7.5% to $20.52 early this afternoon, the best performer among ETFS that track the sectors of the S&P 500. Seventy-four of the 87 stocks in the financial sector had gains on the day, including Merrill Lynch, up 30% to $22.18, and Washington Mutual (WM, news, msgs), up 16% to $2.32.

Separately, investment bank Morgan Stanley (MS, news, msgs), formed 75 years ago today, reported better than expected earnings. The company earned $1.43 billion, or $1.32 a share, on revenue of $8 billion, compared with $1.47 billion, or $1.38 a share, on revenue of about $7.9 billion.

Analysts had expected 78 cents in earnings on revenue of $6.3 billion.

Morgan Stanley shares, which had fallen 10.8% to $28.70 in regular trading, initially jumped more than 10% in after-hours trading. They fell back later, however, and were up 2.9% to $31.60 at 7:30 p.m. ET.

Investors around the world were also being buffeted by the unfolding crisis.

London's FTSE 100 Index ($GB:UKX) was down 3.4% to 5,020, and Germany's Dax Index ($DE:DAX) was off 1.6% to 5,965.

In Asia, the markets closed on a down note. Japan's Nikkei 225 Index ($N225) lost 5%, and Hong Kong's Hang Seng Index ($HSIX) closed down 5.4% today.

In early trading Wednesday, both indexes were higher.

The fallout from the Lehman bankruptcy

While the stock market rallied today -- and boosted the arguments of those who said it was OK to let the investment house fail -- there were two results of the debacle today:

• Barclays (BCS, news, msgs), which declined to buy Lehman outright, will buy Lehman's U.S. investment bank and capital-markets businesses. As many as 9,000 Lehman employees will find jobs with Barclays. The deal is to be put before a New York bankruptcy court judge for approval this evening. Lehman's creditors were to meet at 6 p.m. An official announcement wasn't expected until Wednesday morning.

• Reserve Primary Fund ($RPFXX) became the first money-market fund in 14 years to expose investors to losses after writing off $785 million of debt issued by Lehman. The fund, whose assets plunged more 60% to $23 billion in the past two days, said the Lehman losses forced the net value of its assets below $1 a share, known as breaking the buck. Reserve Primary, the oldest money fund in the nation, fell to 97 cents a share and redemptions were suspended for as long as seven days.
  

A hostile bid for SanDisk

Samsung Electronics, the world's second-largest chip maker, made a $5.85 billion hostile bid for SanDisk (SNDK, news, msgs) to widen its lead in the market for semiconductors that store pictures and music in cameras and mobile phones.

Samsung offered $26 in cash for each SanDisk share.

That's a 73% premium to SanDisk's latest closing price, leading the stock to jump 56% in after-hours trading.

WaMu cut to junk, next to go?

Shares of Washington Mutual moved higher today, despite Standard & Poor's move late Monday to downgrade its ratings to junk status.

The ratings agency cut WaMu's rating to "BB-minus," which is three levels below investment grade. "Increasing market turmoil and the related impact from managing its concentrated mortgage franchise in this troubled housing and credit cycle led to the downgrade," S&P said.

Washington Mutual has lost $6.3 billion in the past three quarters; last week, WaMu said it expects to set aside $4.5 billion for loan losses in the third quarter. The loan-loss provision estimate was down from the $5.9 billion WaMu set aside in the second quarter, but it was more than analysts had expected.

"On a more positive note, we recognize that WaMu's holding company liquidity position is currently solidly positioned to meet all of its fixed obligations through 2010," S&P said. "The bank is operating with adequate capital positions from a regulatory perspective and has demonstrated funding resilience as the deposit franchise has remained stable."

Washington Mutual has lost 94% of its value over the past year.

Goldman reports profit

Goldman Sachs (GS, news, msgs) shed some light with its third-quarter results.

Goldman earned $845 million, a huge decline from the $2.85 billion the company earned last year. On a per share basis, Goldman earned $1.81, topping the consensus estimate of $1.71 per share. Revenue fell 36% to 6.04 billion.

Shares initially fell more than 14% on the news but finished down just 1.8% to $133.01.

Many analysts had lowered their expectations.

The financial crisis that hit Wall Street over a year ago and a slowing global economy are affecting banks across the street. Global growth has slowed, hitting profits, Chief Financial Officer David Viniar said during a conference call with reporters today. "As soon as global growth picks up, our business will pick up across the board," he said.

CEO Lloyd Blankfein's reference to a "marked decrease in client activity" is a big turnaround from three months ago, when Goldman said client activity was "solid" in fixed-income trading and "strong" in equities trading, The Wall Street Journal said.

Consumer prices fall

Consumer prices fell 0.1% in August after rising 0.8% in July, the Labor Department reported this morning. It was the first monthly decline in nearly two years.

The core Consumer Price Index rose 0.2% last month, in line with expectations. The core number excludes volatile food and energy prices.

"The moderation in headline inflation is going to reflect lower energy prices, a global economy that is on the edge of recession and modest wage pressures," Ryan Sweet, economist at Moody's Economy.com, told Bloomberg News.

HP to cut jobs

Hewlett-Packard (HPQ, news, msgs) late Monday said it will cut 24,600 jobs as a result of the integration of Electronic Data Systems into HP.

The cuts, which represent about 7.5% of the company's combined workforce, will take place over three years, the company said.

HP expects cost savings of $1.8 billion a year as a result of the cuts but will take a $1.7 billion charge in its fiscal fourth quarter of 2008.

Wall Street cheered the move. HP shares were up 6.8% to $48.41.

• Top Stocks blog: HP shares up after layoff news

MSN Money columnist Andy Rosenbaum contributed to this report.

Short hits from the markets -- 4 p.m.

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	0.860%	0.810%	0.050	-49.11%	-72.61%
5-year Treasury note yield	2.671%	2.601%	0.070	-13.53%	-22.69%
10-year Treasury note yield	3.491%	3.483%	0.008	-8.44%	-13.48%
30-year Treasury bond yield	4.095%	4.152%	-0.057	-7.18%	-8.16%
Currencies
U.S. Dollar Index	79.530	79.395	0.135	2.62%	3.70%
British pound in dollars	$1.7864	$1.7995	-0.0132	-1.93%	-10.20%
Dollar in British pounds	£0.5598	£0.5557	0.0041	1.97%	11.36%
Euro in dollars	$1.4154	$1.4269	-0.0115	-3.54%	-3.16%
Dollar in euros	€ 0.7065	€ 0.7008	0.0057	3.67%	3.26%
Dollar in yen	105.87	104.35	1.52	-2.67%	-5.35%
Canadian dollar in U.S. dollars	$0.937	$0.936	$0.0012	-0.38%	-5.65%
U.S. dollar in Canadian dollars	$1.068	$1.069	-$0.0004	0.41%	6.01%
Commodities
Gold	$780.50	$787.00	-$6.50	-6.55%	-6.86%
Copper	$3.0890	$3.1365	-$0.05	-8.80%	1.58%
Silver	$10.5170	$11.1350	-$0.62	-23.27%	-29.51%
Corn	$5.3225	$5.6200	-$0.30	-6.34%	16.85%
Crude oil (NYMEX) (per barrel)	$91.15	$95.71	-$4.56	-21.05%	-5.03%