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With the financial markets reeling, the Federal Reserve announced late Tuesday that it would loan American International Group Inc., $85 billion in exchange for a 79.9 percent stake in the world’s largest insurer. AIG will sell assets to repay the loan. The rescue came only nine days after the U.S. Treasury Department took over the federally chartered mortgage companies Fannie Mae and Freddie Mac. But it represents a change of approach from the government’s refusal just two days ago to use taxpayer money to bail out the venerable investment bank Lehman Brothers Holdings Inc. Lehman, the nation’s fourth largest investment bank, filed for Chapter 11 protection at 1:35 a.m. Monday morning in the Southern District, reporting $613 billion in debt. That made the bankruptcy case larger than the failure of WorldCom in 2002 and Drexel Burnham Lambert in 1990. Meanwhile, Bank of America Corp. agreed to buy Merrill Lynch & Co. for $50 billion. The Charlotte, N.C., buyer offered .8595 of a bank share for each Merrill Lynch common share. The deal will convert the top U.S. retail bank into the world’s largest wealth manager and broker.

The AIG Bailout The Federal Reserve and the Treasury Department were both represented by Davis, Polk & Wardwell in the AIG bailout, The American Lawyer, a Law Journal affiliate, reported. The Treasury Department was also advised by Wachtell, Lipton, Rosen & Katz. The New York-based Davis Polk team included partners Bradley Smith and Robert Heckart, credit; Marshall Huebner and Donald Bernstein, corporate; and Ethan James, financial institutions.

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