U.S. Deducts AIG Bonus Payments From Financial Aid

Alyn Ackermann
A. M. Best
April 20, 2009

NEW YORK, Apr 20, 2009 (A. M. Best via COMTEX) --  The U.S. Treasury Department has deducted the money American International Group Inc. paid in controversial retention bonuses in March from $30 billion in additional federal assistance designated for AIG, according to regulatory filings by the company.

Treasury deducted the $165 million in payments made to employees of AIG Financial Products from the agreement to add up to $30 billion to the federal rescue plan, bringing the total up to $182.5 billion in loans and other aid, AIG (NYSE: AIG) said in filings with the U.S. Securities and Exchange Commission.

The Treasury has committed to provide up to $29.84 billion for five years, after the bonus payments were deducted. In exchange, the AIG Credit Facility Trust, which holds all federal investments in AIG, will receive 300,000 shares of series F fixed-rate, noncumulative perpetual preferred stock and a warrant to purchase up to 3,000 shares of common stock.

The terms of the securities sales agreement placed several restrictions on AIG.

Under the agreement, the Treasury will withdraw its investment if AIG files for bankruptcy protection. The agreement mandates that the government must remain AIG's majority owner. Its also limits AIG's ability to repurchase capital stock

It requires AIG to continue to maintain policies limiting corporate expenses, lobbying activities and executive compensation that the insurer has agreed to since it first accepted federal assistance in September 2008.

The addition funding was announced as AIG posted a record $61.7 billion fourth-quarter net loss. The federal government originally provided an $85 billion bailout in September to prevent AIG from falling into bankruptcy, receiving a 79.9% equity stake in the insurer. Later, a $150 billion program was instituted to keep the company solvent while it reorganizes and sells assets to repay the federal aid (BestWire, March 2, 2009).

According to AIG, as of last week, approximately $80 billion of the federal aid is in loans through the federal Troubled Asset Relief Program and drawn down from a Federal Reserve-funded credit facility.

A political and public firestorm followed reports that the bonuses, or retention payments, were made to employees of AIG's Financial Products division. The unit was largely blamed for the credit default swaps and other derivatives that jeopardized AIG's solvency when it was unable to meet tens of billions of dollars in collateral calls following a series of rating downgrades in September 2008 (BestWire, March 23, 2009).

Most AIG insurance companies currently have a Best's Financial Strength Rating of A (Excellent) with a negative outlook.

Shares of AIG were $1.34 in afternoon trading on April 20, down 17.3% from the previous close.

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