The action aimed at averting a new global economic shock calls for the US Federal Reserve to loan up to US$85 billion (S$121.5 billion) to avert a collapse at American International Group (AIG).

The move came just nine days after the US government nationalised two other giants of the financial system, Fannie Mae and Freddie Mac, drowning from the collapse of the US real estate market.

AIG appeared to be in a death spiral after more than a week of panic and turmoil in financial markets that led to the failure of investment giant Lehman Brothers - the biggest bankruptcy in US history - and an emergency sale of Wall Street rival Merrill Lynch.

Some analysts said the action orchestrated by Fed chairman Ben Bernanke with the blessing of Treasury Secretary Henry Paulson pushes the government further toward nationalisation.

'The move represents the largest lurch toward socialism that this country has ever seen, and signals the end of the vibrancy of America's once vaunted free market economy,' said Mr Peter Schiff, president of Euro Pacific Capital.

'Since there is no limit to the amount of money the Fed can create, there is no limit to the number of assets they can acquire.'

Professor Nouriel Roubini, a New York University economist, said the action is part of a 'transformation of the USA into a country where there is socialism for the rich, the well connected and Wall Street - where profits are privatised and losses are socialised.'

Prof Roubini, nicknamed 'Dr Doom' because of his grim economic outlook, said the AIG rescue means that 'the US government is now the largest insurance company in the world.'

Mr Robert Brusca at FAO Economics said however it was 'not a nationalisation' because the Fed does not intend to run AIG. 'The Fed will get a profit on this, which it should.'

Mr Brusca said the deal appears structured in a way similar to the one that bailed out Chrysler in the 1980s that gives the government warrants that are special shares.

He said the loan is at 'an extremely high rate' and will encourage AIG to quickly sell off assets to pay back the loan.

Mr Brusca said AIG 'pays a steep price' for the rescue.

'Any firm tottering on the edge here is not going to feel that there is a safety net it will want to fall into. Think Vie tnam-era death pits with pungi sticks at the bottom.'

Others said the action represents the lesser of two evils, and averts a calamitous shock to an already fragile global financial system.

Dr Diana Furchtgott-Roth, senior fellow at Hudson Institute, a Washington think tank, said the move was prudent and that the government should be able to get out with a profit for taxpayers.

'In this case the ramifications of having AIG fail would have been so great it was necessary to do something,' she said.

'The government has taken it over for now but doesn't have to keep it. The assets can be sold.'

Mr Bill Witherell, chief global economist at Cumberland Advisors, added that 'it was not the intention (of US officials) to increase the role of government but I don't think they had any choice. If AIG failed it would have had a systemic impact across the global financial markets.'

For now, Mr Witherell said the AIG recue appears to be the last government intervention to save a company seen as too big to fail.

'It's hard to find another example of an institution that has such a central role in the financial system,' he said. -- AFP