Asia stocks, oil rally on AIG rescue

By Kevin Plumberg

HONG KONG (Reuters) - Asian stocks rose and oil was up $3 a barrel on Wednesday after the Federal Reserve said it would bail out American International Group in a dramatic about-face as victims of the financial crisis kept piling up.

After reports about the plan surfaced, investors bought back equities while selling the government bonds and yen they had accumulated in the wake of Lehman Brothers' filing for bankruptcy protection on Monday. However, the stock market rally across the region was still rather tame amid lingering fears about the banking sector.

Indications of fear in markets were elevated and evidence showed hoarding of U.S. dollars among banks, reflecting distrust rather than confidence.

The Fed will provide AIG, once the largest insurer in the world, a bridge loan of $85 billion and take an 80 percent stake in the ailing company, defusing the immediate risk of a financial system meltdown but burdening the U.S. taxpayer more following the government takeover of Fannie Mae and Freddie Mac about a week ago.

The move was a surprise to some since the U.S. government had allowed Lehman to fail only days ago, suggesting how unstable markets have forced consumers, investors and policymakers alike to be flexible.

"I expect the markets will be a bit better today but that's after a very rough period," said Peter Hilton, head of Asia equity research with Royal Bank of Scotland in Hong Kong. "People were a bit worried about their effective savings. So relieving that pressure helps some," he said.

Japan's Nikkei share average rose 2.1 percent after closing at a three-year low on Tuesday. Shares of Japan's top bank Mitsubishi UFJ Financial Group was lagging the broad market, up 1.5 percent.

The MSCI Asia-Pacific ex-Japan stocks index pared early gains and was up 1 percent at 0315 GMT, after hitting a two-year low on Tuesday. It is down 36 percent so far this year.