AIG May Get More in Bailout
By Andrew Ross Sorkin and Mary Williams Walsh
New York Times
November 9, 2008
The Bush administration was overhauling its rescue of the American International Group on Sunday night, according to people involved in the deal, amid signs that the interest on its current credit line of more than $100 billion was putting too much strain on the ailing insurer.
The Treasury Department and the Federal Reserve were near a deal to abandon the initial bailout plan and invest another $40 billion in the company, these people said. The government created an $85 billion emergency credit line in September to keep A.I.G. from toppling and added $38 billion more in early October when it became clear that the original amount was not enough.
When the restructured deal is complete, taxpayers will have invested and lent a total of $150 billion to A.I.G., the most the government has ever directed to a single private enterprise. It is a stark reversal of the government’s assurance that its earlier moves had stabilized A.I.G.
The revised deal, which may be announced as early as Monday morning, is likely to intensify the debate in Washington over why some companies should be saved by the government while others are left to wither.
The money would come from the $700 billion that Congress authorized the Treasury to use to shore up financial companies. Just this weekend, Democratic leaders in Congress called on the Bush administration to drop its opposition to using some of that money to rescue Detroit automakers.
The government’s original emergency line of credit, while saving A.I.G. from bankruptcy for a time, now appears to have accelerated the company’s problems. That short-term loan came with a high interest rate about 14 percent which forced the company into a fire sale of its assets and reduced its ability to pay back the loan, putting its future in jeopardy.
The new deal would make the government a long-term investor in A.I.G., something that Treasury Secretary Henry M. Paulson Jr. had said he hoped to avoid. As part of the revamping, the government would lower the loan amount to $60 billion from $85 billion, lengthen the payment schedule to five years from two years, and lower the interest rate.
At the same time, the government, using part of the $700 billion fund, would buy $40 billion in preferred shares in A.I.G. In return, A.I.G. would pay a 10 percent interest rate on those shares, similar to the interest rate that banks agreed to pay last month when they received cash injections.
The government is also planning to spend an additional $30 billion to help A.I.G. buy up a type of securities called “collateralized debt obligations” that the company had agreed to insure against default. As the insurer of those securities, A.I.G. has been forced to put up large amounts of cash as collateral as the global economy has soured and the securities seemed increasingly likely to default.
Indeed, these securities, worth hundreds of billions of dollars, are held by institutional investors around the world, a fact that government officials have cited to justify saving the company using taxpayer money.
The new arrangement calls for A.I.G. to put the securities into a new entity, effectively removing them from the company’s balance sheet. A.I.G. would contribute $5 billion to the new entity, which would buy $70 billion of the securities at 50 cents on the dollar, or $35 billion. The remaining $30 billion of the purchase price would come from the government.
Finally, the government would invest another $20 billion in A.I.G. to help the company buy residential mortgage-backed securities that it also insured, and similarly place them into another entity off the company’s balance sheet.
The goal of both programs is to create separate entities to buy and hold the most toxic assets A.I.G. had promised to insure, so that if their value continues to fall A.I.G. would not have to account for those losses. The company has argued that the securities’ falling value does not necessarily mean it has suffered a financial loss.
Once A.I.G. buys the securities back from its trading partners, it will no longer have to provide cash as collateral under the terms of its insurance contracts and collateral has been eating up more of A.I.G.’s cash than anything else since the broad financial crisis began.
A spokeswoman for the Fed declined to comment. A spokeswoman for the Treasury did not return a call for comment. A spokesman for A.I.G. declined to comment.
A.I.G. negotiated the original $85 billion revolving credit line with the Federal Reserve after its efforts to raise money from private lenders failed in the panic of mid-September. The amount that it needed ballooned in just a few days, as counterparties to A.I.G.’s insurance on complex debt securities laid claim to whatever collateral they could get.
People briefed on the negotiations said the $85 billion was thought at the time to be the maximum amount that A.I.G. would need, including a little extra for a cushion. The interest rate was set at the three-month Libor plus 8.5 percent, which currently works out to around 14 percent. (Libor, or London interbank offered rate, is a commonly used index that tracks the rates banks charge when they lend to each other.) In exchange for making the loan, the Fed was promised a 79.9 percent stake in A.I.G.
The $40 billion of preferred shares will not change the size of the government’s stake in A.I.G., people briefed on the plans said.
Edward Liddy, the insurance executive brought in to lead the company out of the crisis, initially said he believed the Fed money would be like water pouring into a bathtub a lot might be needed at first, but eventually the tub would be filled and the faucet could be turned off.
Since then, A.I.G. turned out to need more money than expected, and it has not been able to sell subsidiaries quickly enough to pay down the loan as required.
Even as the government works to solidify A.I.G.’s finances, elected officials have been demanding a fuller accounting of the company’s business practices and executive pay structure. In October, the New York attorney general, Andrew M. Cuomo, reached an agreement forcing A.I.G. to freeze payments to former executives.
“I find it hard to conceive of situation that you could justify a performance bonus for management that virtually bankrupted the company,” Mr. Cuomo said after the agreement was made.
That agreement followed the revelation, in a hearing convened by Representative Henry A. Waxman, Democrat of California, that the former head of A.I.G.’s troubled financial products unit, Joseph J. Cassano, had been put on a retainer of $1 million a month after being dismissed in February.
Mr. Waxman, as well as Senator Charles E. Grassley, Republican of Iowa, have demanded that A.I.G. provide a more detailed accounting of its credit derivatives business.
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