the equity of substantially all of aig's regulated subsidiaries. example, nonconforming jumbo mortgages – cannot be securitized and thus carry much higher interest rates than conforming mortgages. some lenders have reduced borrowing limits on home equity lines of credit. households also appear to be having more difficulty of late in obtaining nonmortgage credit. for example, the federal reserve's senior loan officer opinion survey reported that as of july an increasing proportion of banks had tightened standards for credit card and other consumer loans. in the business sector, through august, the financially strongest firms remained able to issue bonds but bond issuance by speculative - grade firms remained very light. more recently, however, deteriorating financial market conditions have disrupted the commercial paper market and other forms of financing for a wide range of firms, including investment - grade firms. financing for commercial real estate projects has also tightened very significantly. when worried lenders tighten credit, then spending, production, and job creation slow. real economic activity in the second quarter appears to have been surprisingly resilient, but, more recently, economic activity appears to have decelerated broadly. in the labor market, private payrolls shed another 100, 000 jobs in august, bringing the cumulative drop since november to 770, 000. new claims for unemployment insurance are at elevated levels and the civilian unemployment rate rose to 6. 1 percent in august. households'real disposable income was boosted significantly in the spring by the tax rebate payments, but, excluding those payments, real after - tax income has fallen this year, which partly reflects increases in the prices of energy and food. in recent months, the weakness in real income together with the restraining effects of reduced credit flows and declining financial and housing wealth have begun to show through more clearly to consumer spending. real personal consumption expenditures for goods and services declined in june and july, and the retail sales report for august suggests that outlays for consumer goods fell noticeably further last month. although the retrenchment in household spending has been widespread, purchases of motor vehicles have dropped off particularly sharply. on a more positive note, oil and gasoline prices – while still at high levels, in part reflecting the effects of hurricane ike – have come down substantially from the peaks they reached earlier this summer, contributing to a recent improvement in consumer confidence. however, the weakness in the fundamentals underlying consumer spending suggest that household expenditures will be sluggish, at best, in the near

firms. the federal reserve, with which fhfa consulted on the conservatorship decision as specified in the july legislation, supported these steps as necessary and appropriate. we have seen benefits of this action in the form of lower mortgage rates, which should help the housing market. the federal reserve and the treasury attempted to identify private - sector solutions for aig and lehman brothers, but none was forthcoming. in the case of aig, the federal reserve, with the support of the treasury, provided an emergency credit line to facilitate an orderly resolution. the federal reserve took this action because it judged that, in light of the prevailing market conditions and the size and composition of aig's obligations, a disorderly failure of aig would have severely threatened global financial stability and, consequently, the performance of the u. s. economy. to mitigate concerns that this action would exacerbate moral hazard and encourage inappropriate risk - taking in the future, the federal reserve ensured that the terms of the credit extended to aig imposed significant costs and constraints on the firm's owners, managers, and creditors. the chief executive officer has been replaced. the collateral for the loan is the company itself, together with its subsidiaries. 1 ( insurance policyholders and holders of aig investment products are, however, fully protected. ) interest will accrue on the outstanding balance of the loan at a rate of three - month libor plus 850 basis points, implying a current interest rate over 11 percent. in addition, the u. s. government will receive equity participation rights corresponding to a 79. 9 percent equity interest in aig and has the right to veto the payment of dividends to common and preferred shareholders, among other things. in the case of lehman brothers, a major investment bank, the federal reserve and the treasury declined to commit public funds to support the institution. the failure of lehman posed risks. but the troubles at lehman had been well known for some time, and investors clearly recognized – as evidenced, for example, by the high cost of insuring lehman's debt in the market for credit default swaps – that the failure of the firm was a significant possibility. thus, we judged that investors and counterparties had had time to take precautionary measures. while perhaps manageable in itself, lehman's default was combined with the unexpectedly rapid collapse of aig, which together contributed to the development last week of extraordinarily turbulent conditions in global financial markets