Small caps fluctuate on possible federal aid to AIG

Following the worst one-day point drop since the terrorist attacks of Sept. 11 and a lower opening, small caps are flickering in and out of the green, after news that the government might extend a lifeline to troubled insurance company AIG and ahead of the Fed’s policy decision this afternoon.

At 11:45 a.m. ET, the Russell 2000 (NYSE:IWM) was flat at 692.53, up 2.77, or 0.4%.

After turning AIG (NYSE:AIG) down Monday, the government is now reconsidering extending financial aid to the company, according to CNBC. Markets are watching the insurance juggernaut closely, as its fate remains uncertain and any potential failure would severely rock the financial system. The company must raise $75 billion today to remain afloat, which is on top of the $14.5 billion raised overnight to cover obligations in the wake of fresh rating agency credit downgrades. Shares remain down 50% midday. 

“My gut tells me that AIG will be rescued as it's not Lehman: $1 trillion in assets versus $629 billion,” Andy Busch, global foreign exchange strategist, said in an email. “More importantly, the insurance angle (lots of problems with an unwind) should be enough to get a package together.” 

Just one day after Lehman Brothers (NYSE:LEH) declared bankruptcy, the demolished U.S. investment bank is reportedly close to a deal with British bank Barclays, in which Barclays would acquire its U.S. broker-dealer unit for roughly $2 billion. Barclays, which initially walked away from a takeover deal over the weekend, has been looking to increase its exposure in the U.S. market.

Following the intense selling pressure Monday, the Federal Reserve aided liquidity levels in the market today by pumping $50 billion into the system. This is on top of the $20 billion the Federal Reserve Bank of New York was already slated . . .

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