AIG May Get Expanded Government Funds of $150 Billion (Update1)

By Hugh Son
Bloomberg News
November 3, 2008

Nov. 10 (Bloomberg) – American International Group Inc., the insurer bailed out by the U.S., may get an expanded government rescue package valued at more than $150 billion that includes lower interest rates and more time to repay the debt.

The U.S. will reduce the original $85 billion loan that saved New York-based AIG in September to $60 billion, buy $40 billion of preferred shares, and purchase $52.5 billion of mortgage securities owned or backed by the company, according to a person familiar with the matter. The funds will help AIG retire part of its credit-default swap holdings and bolster its securities lending operations, said the person, who declined to be identified because the plan hasn't been officially announced.

The changes may give Chief Executive Officer Edward Liddy more time to salvage AIG, which needed U.S. help to escape bankruptcy after three quarterly losses exceeding $18 billion. Liddy's plan to repay the original loan by selling units stalled as plunging financial markets cut into their value and forced potential buyers to shore up their own balance sheets.

"It makes a lot of sense to renegotiate the terms,'' said Andrew Kligerman, a New York-based analyst at UBS AG, in an interview before the disclosure. By giving AIG more time to sell units, the government "has a better opportunity to recover its capital,'' he said.

Michelle Smith, a spokeswoman for the Federal Reserve in Washington, and AIG's Nicholas Ashooh declined to comment. AIG is scheduled to disclose third-quarter results later today. Terms of the expanded package were reported earlier by the Wall Street Journal. AIG rose 19 cents today to $2.30 in German trading.

New Terms

In addition to the $85 billion loan on Sept. 16, AIG got two government credit lines totaling $58.7 billion last month to cover losses, including $37.8 billion for securities lending.

Now, the two-year, $85 billion loan AIG received on Sept. 16 will be changed to $60 billion that must be repaid in five years, the person said. AIG will pay interest of 3 percent, rather than the original 8.5 percent, plus the London interbank offered rate, on amounts the firm borrows.

On amounts AIG doesn't draw down, it will pay interest of 0.75 percent, as opposed to 8.5 percent under the earlier agreement, the person said. AIG investors had complained the rates were so high that they almost guaranteed the company wouldn't have a chance to recover.

AIG gets another $40 billion from the Treasury's $700 billion Troubled Asset Relief Program, the person said. In exchange for the cash, the government receives preferred shares that pay 10 percent annual interest.

The U.S. stake in AIG, measured by its common stock, would remain at 79.9 percent.

Securities Lending

The new rescue package may fix two AIG operations that are draining cash with the collapse of subprime mortgage markets. In the first, the U.S. will put $30 billion into a fund that buys the underlying assets of credit-default swaps that AIG sold to investors, including banks, the person said. The insurer will chip in $5 billion. The fund also aims to retire swaps that protect about $70 billion of assets, the person said.

In the second fund, the U.S. will add $22.5 billion to buy mortgage-related bonds in AIG's securities-lending portfolio, according to the person. The insurer will put $1 billion into the facility, the person said. The insurer lost money on investments made using collateral from securities it loaned to third parties. The $37.8 billion credit line that the Fed gave AIG last month to support this operation will be terminated, the person said.

The expanded aid to AIG may help stabilize companies that depend on AIG to protect them against debt-market losses. The government allowed Lehman Brothers Holdings Inc. to collapse on Sept. 15, and then reversed its opposition to an AIG bailout after the Fed concluded that the insurer's failure would "add to already significant levels of financial market fragility.''

'Nimbler' Company

AIG guaranteed $441 billion of fixed-income investments for counterparties, including banks, as of June 30.

Liddy, 62, said Oct. 3 that AIG would sell life insurance units in the U.S., Europe and Japan, along with the firm's reinsurer, airplane lessor, consumer finance division and asset manager, leaving what he called a "nimbler'' company focused on property and casualty coverage.

Potential bidders have been hobbled by their own investment losses and higher borrowing costs, according to analysts.

"Clearly, we'd prefer to be doing this asset sale a year ago, or two years ago, than right now, but there'll be plenty of excellent demand for what are really good assets,'' Liddy said in an Oct. 22 PBS interview.

AIG, once the world's largest insurer, could have raised $115 billion by disposing of all its units, Thomas Gallagher, an analyst at Credit Suisse Group AG, estimated in September. Sales prospects fell the next month as shares of U.S. life insurers dropped 44 percent on concern investment losses will sap capital.

'Stabilizing AIG'

The government "did the right thing in September by stabilizing AIG, and they couldn't have anticipated the kinds of challenges the company would face over the next six weeks,'' said Mickey Kantor, a lawyer representing AIG's biggest shareholders, in an interview late last week. The group has met with the Fed and Treasury to lobby for a new deal for AIG, he said.

The shareholder group includes former CEO Maurice "Hank'' Greenberg, who controlled about 10 percent of shares before the government takeover of AIG. Greenberg said Nov. 7 on CNBC that a revised bailout should be favorable to attract outside investors.

"Are the terms going to be changed enough so that the company has a realistic future?'' Greenberg said.

Liddy was appointed by the U.S. as a condition of AIG's bailout. The insurer's losses led to the ouster of two CEOs, Martin Sullivan and Robert Willumstad, in the past six months.

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