US government restructures AIG bailout package

The Federal Reserve said on Monday the US government would buy $40 billion of shares in insurer American International Group as part of
a restructured bail-out package intended to prevent the firm from collapsing.

The new package will allow the Fed to cut to $60 billion from $85 billion the total available to AIG under a credit facility set up in September.

The US government would lower the interest rate on loans to the firm and establish two facilities to buy mortgage-backed securities from AIG and collateralized debt obligations on which AIG has written credit default swap contracts, the Fed said in a statement.

"The US Treasury ... will purchase $40 billion of newly issued AIG preferred shares under the Troubled Asset Relief Program," the Fed said.

"This purchase will allow the Federal Reserve to reduce from $85 billion to $60 billion the total amount available under the credit facility established by the Federal Reserve Bank of New York on September 16, 2008."

The government gave AIG, once the world's largest insurer by market value, $85 billion in bail-out financing in September after counterparties and rating downgrades forced it to post large amounts of collateral for credit derivatives positions.

It later offered additional financing to bring the support extended to AIG up to $123 billion.

The Fed lowered the interest rate on the credit facility established September 16 to three-months LIBOR plus 3 percentage points from the current LIBOR plus 8.5 percentage points.

"These new measures establish a more durable capital structure, resolve liquidity issues, facilitate AIG's execution of its plans to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the US government and taxpayers," the Fed said.

Source: EconomicTimes