WASHINGTON — The Federal Reserve Board late Tuesday provided an $85 billion loan to American International Group Inc.

Under the agreement the Federal Reserve Bank of New York will lend the struggling insurance giant $85 billion for up to two years and receive a 79.9% equity interest. The Fed will have the right to veto dividend payments to AIG shareholders, replace management, and inspect the firm's books.

In a statement, the Fed said: "The Board determined that, in current circumstances, 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 loan will be collateralized by the assets of AIG and its primary non-regulated subsidiaries. The action comes after the government refused to bail out Lehman Brothers last weekend, a move many interpreted as drawing a line against future rescues after the government arranged the sale of Bear Stearns Cos. this spring and put Fannie Mae and Freddie Mac into conservatorship on Sept. 7. But Fed staff insisted the loan extended to AIG could be repaid from proceeds of the sale of the firm's assets.

Treasury Secretary Henry Paulson backed the Fed's move.

"These are challenging times for our financial markets," Mr. Paulson said in a statement. "We are working closely with the Federal Reserve, the SEC, and other regulators to enhance the stability and orderliness of our financial markets and minimize the disruption to our economy.  I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions, and at the same time protect the taxpayers."

AIG's credit rating was downgraded Monday night, and on Tuesday it attempted to raise $75 billion from banks, but by the end of the day the banks balked. Fed staff said the action was taken Tuesday because the company requested the Fed's assistance.

Senate Banking Committee Chairman Chris Dodd in a statement Tuesday tried to pin the blame for AIG's condition on the Bush administration.

"This decision is a clear sign that the financial crisis — which is a direct consequence of this administration's neglect and wayward economic policies — continues to deepen," Sen. Dodd said. "Actions that were inconceivable just days ago are now occurring in a manner and at a pace that is certainly cause for concern."

The Connecticut Democrat said the committee will ask administration officials how the actions will affect taxpayers. He also said he wants to know: "To what extent will it calm the markets — or just add to the uncertainty?  And does this Administration have a coherent strategy to put our economy on stronger, steadier footing?"

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