AIG Gets Expanded Bailout, Posts $24.5 Billion Loss (Update4)

By Hugh Son, Craig Torres, and Erik Holm
Bloomberg News
November 10, 2008

Nov. 10 (Bloomberg) -- American International Group Inc. got a $150 billion government rescue package, almost doubling the initial bailout of less than two months ago as the insurer burns through cash at a record rate.

AIG will get lower interest rates and $40 billion of new capital from the government to help ease the impact of four straight quarterly deficits, including a $24.5 billion third- quarter loss posted today by the New York-based company.

Taxpayers will take on the extra risk to give Chief Executive Officer Edward Liddy more time to salvage AIG. The insurer, which needed U.S. help to escape bankruptcy in September, has posted about $43 billion in quarterly losses tied to home mortgages. Liddy's plan to repay the original $85 billion loan by selling units stalled as plunging financial markets cut into their value and hobbled potential buyers.

"It was obvious to me from Day One that the terms of that arrangement were really quite punitive in terms of the interest rate and the commitment fee and the shortness of it,'' Liddy said today in a Bloomberg Television interview. "I started really about a week after I got here trying to renegotiate.''

AIG advanced 22 cents, or 10 percent, to $2.33 at 12:39 p.m. in New York Stock Exchange composite trading. A year ago the shares sold for more than $56.

The first rescue plan wasn't sustainable, Liddy said during a conference call today. AIG's third-quarter loss equaled $9.05 a share and compared with profit of $3.09 billion, or $1.19, a year earlier, AIG said in a statement. Losses in the past year erased profit from 14 previous quarters dating back to 2004.

Affordable Terms

To improve AIG's chances of repaying its debts, the U.S. will reduce the $85 billion loan to $60 billion, buy $40 billion of preferred shares, and purchase $52.5 billion of mortgage securities owned or backed by the company, the Federal Reserve said today in a separate statement.

The move extends the government's reach into the financial system amid the worst economic crisis in 75 years. The U.S. seized control of Fannie Mae and Freddie Mac, lenders that guarantee or own about 40 percent of the $12 trillion in U.S. mortgages, in September. The next month, Treasury Secretary Henry Paulson unveiled a $250 billion program to recapitalize banks.

"This action was necessary to maintain the stability of our financial system,'' Neel Kashkari, the interim assistant secretary who heads the Treasury's office overseeing the bailout, said today at a Securities Industry and Financial Markets Association conference in New York.

The new AIG package includes a freeze on the bonus pool for 70 top executives and imposed limits on severance benefits, the Treasury said in its statement. Lawmakers had said failing companies getting taxpayer bailouts shouldn't be using the money for multimillion-dollar pay packages.

Securities Lending

The U.S. reversed its opposition to a bailout of AIG when the Fed concluded that ripple effects from the insurer's failure could bring down more financial firms. The original $85 billion loan was disclosed on Sept. 16, a day after investment bank Lehman Brothers Holdings Inc. was allowed to collapse. AIG got an additional $37.8 billion credit line on Oct. 8 to shore up its securities-lending program and then another $20.9 billion on Oct. 30 under the Fed commercial paper program designed to unlock short-term debt markets.

The revised rescue may fix two AIG operations that are draining cash because of the collapse of subprime mortgage markets. In the first, the U.S. will provide as much as $30 billion to help buy the underlying assets of credit-default swaps that AIG sold to investors, including banks. AIG will contribute $5 billion and bear the risk of the first $5 billion in losses, the Fed said.

Credit-Default Swaps

The insurer guaranteed about $372 billion of fixed-income investments as of Sept. 30, compared with $441 billion three months earlier. AIG booked more than $7 billion in write-downs during the quarter on the value of the swaps.

The New York Fed also will lend as much as $22.5 billion to a new limited-liability company to fund the purchase of residential mortgage-backed securities from AIG's U.S. securities-lending collateral portfolio. AIG will make a $1 billion subordinated loan to the new entity and bear the risk for the first $1 billion of any losses, the Fed said. The securities lending operation and the previous $37.8 billion credit line from the Fed will be shut down, AIG said.

Securities lending accounted for $11.7 billion, or about two-thirds, of the $18.3 billion in impaired investments in the third quarter, AIG said.

'Breathing Room'

The interest rate on the $60 billion credit line will be reduced to the three-month London interbank offered rate plus 3 percentage points, from a previous spread of 8.5 percentage points in the original rescue plan, the Fed said. AIG's assets continue to secure the loan.

"This gives AIG much more breathing room,'' said Robert Haines, an analyst at CreditSights Inc. "Now they have the time and flexibility to sell assets for closer to their intrinsic value rather than fire-sale prices.'' The news is a "big positive'' for bondholders, he said.

AIG will still have access to the $20.9 billion commercial paper program, which has about $5.6 billion left unused, the insurer said. The company renewed doubt about its prospects today by saying in a federal filing that it might not survive.

The Treasury will buy the newly issued preferred shares from the insurer using the agency's $700 billion Troubled Asset Relief Program, a financial rescue package that Congress passed in early October. The company agreed to turn over a 79.9 percent stake to the U.S. in exchange for the initial loan in September.

'Nimble Competitor'

"This plan contributes to stabilizing the financial system and provides the opportunity for the public to realize gains on its AIG investment in the future,'' Liddy said in a statement. "These measures will also put AIG on track to emerge as a nimble competitor with good long-term growth prospects.''

The Fed's loan rates to the special facilities may subsidize AIG. For example, if AIG packaged the assets into a vehicle and sold asset-backed commercial paper against them, the best rate it could obtain from the Fed's Commercial Paper Funding Facility for 90-day notes would be 3.53 percent. The Fed's AIG securities facilities will be financed at 2.54 percent based on today's one- month London Interbank offered rate.

"It seems like a good deal for AIG,'' said Mark Spindel, chief portfolio manager at Potomac River Capital LLC, a Washington investment firm.


The biggest insurers in North America posted more than $120 billion in writedowns and unrealized losses linked to the collapse of the mortgage market from the start of 2007, with AIG representing about half that total. The company has units that insure, originate and invest in home loans.

Liddy, 62, plans to sell life insurance operations in the U.S., Europe and Japan, along with the firm's reinsurer, airplane lessor, consumer finance unit and asset manager. The former CEO of Allstate Corp. was appointed by the U.S. as a condition of AIG's bailout. Liddy said he expects to announce "several'' unit sales in the fourth quarter.

Copyright © 2008 FBIC (

Click here to return to our homepage