AIG gets $150 bn govt bailout; posts huge loss

The government restructured its bailout of American International Group Inc, raising the package to a record $150 billion with easier terms, after a smaller rescue plan failed to stabilize the ailing insurance giant.

The U.S. Federal Reserve and the Treasury Department announced the new plan on Monday as AIG reported a record $24.47 billion third-quarter loss, largely from writedowns of investments.

AIG, once the world's largest insurer by market value, nearly collapsed after being forced to post large amounts of collateral related to exposure to complex derivatives known as credit default swaps. Many of these securities were linked to the performance of residential mortgages, and lost value as the U.S. housing downturn mushroomed into a global credit crisis.

"We cannot continue to hemorrhage cash in the two areas of securities lending and credit default swaps," Chief Executive Edward Liddy said on a conference call. "We need to stop that and we need to stop it now."

Under the new rescue plan, the government will get a $40 billion equity stake in AIG, spend as much as $30 billion on securities underlying the insurer's credit default swaps, and spend up to $22.5 billion to buy residential mortgage securities.

It will also reduce a previously announced credit line to $60 billion from $85 billion, and lower interest rates on borrowings. AIG will also accept curbs on executive pay, including a freeze of bonuses for its top 70 executives.

"The restructured bailout should give AIG the flexibility to sell assets in an orderly manner for closer to their intrinsic values rather than fire-sale prices," CreditSights Inc analyst Rob Haines wrote. "Moreover, we believe that it will help to restore confidence in AIG's global franchise."

In morning trading, AIG shares were up 37 cents, or 17.5 percent, at $2.48 on the New York Stock Exchange. The cost of protecting AIG debt against default declined, indicating that investors see less risk.

ONE-TIME EVENT

The $40 billion equity infusion comes from the $700 billion financial industry bailout package adopted by the government last month.

That package, known as the Troubled Asset Relief Plan, was originally intended for banks. AIG is the first company other than a bank to get money from it. TARP was created after the government on September 16 announced the original $85 billion bailout package for AIG.

"Today's action was a one-off event," Neel Kashkari, the Treasury Department's interim assistant secretary for financial stability, said at a conference in New York. "It is not the start of a new program."

AIG will issue to the government preferred shares carrying a 10 percent dividend. The government said its equity stake in the insurer would still be about 80 percent, making it the biggest beneficiary of the revised bailout.

The $60 billion credit line will mature in five years, and replace an $85 billion line scheduled to mature in two years. This could reduce the potential that AIG would have to quickly sell assets at depressed prices to help repay the government.

In addition, the Fed also slashed the interest rate on the credit line by 5.5 percentage points, to 3 percentage points above three-month Libor (London Interbank Offered Rate).

Liddy said the new terms "create a durable capital structure" that will allow AIG to sell assets and assure that taxpayers are repaid in full with interest.

The revised plan depends on the government being able to convince holders of securities underlying AIG credit default swaps to sell them to the government, likely at a discount.

"The biggest questions attached to these new vehicles are who is going to take how big of a haircut, and when," said Donald Light, an analyst at Celent LLC in San Francisco.

Struggling automakers General Motors Corp, Ford Motor Co and Chrysler LLC have also requested tens of billions of dollars in Treasury aid.

BIG QUARTERLY LOSS

AIG's $24.47 billion quarterly loss equated to $9.05 per share, compared with a profit of $3.09 billion, or $1.19 a share, a year earlier.

Revenue fell to $898 million from $29.8 billion, reflecting the writedowns. AIG also had $1.39 billion of catastrophe losses, primarily from Hurricanes Gustav and Ike.

Credit default swaps had led AIG to $18 billion of losses in the nine months ended June 30.

The cost of protecting $10 million of AIG debt against default for five years fell on Monday to $1.9 million up front plus $500,000 annually, according to Markit Intraday. The upfront payment was $4.9 million on Friday.

Source: EconomicTimes