U.S. Extends $38 Billion In New Loans to AIG
Thursday, October 9, 2008
Turns out the $85 billion bailout loan for AIG wasn't enough.
The company's survival apparently requires another $38 billion in cash, and yesterday the Federal Reserve authorized loaning that much more to the struggling insurance giant.
The government will hold as collateral $38 billion of investment-grade securities owned by AIG.
"This new program will allow AIG to replenish liquidity . . . while providing enhanced credit protection to the New York Fed and U.S. taxpayers in the form of a security interest in these securities," according to the announcement from the Federal Reserve Board.
On Sept. 16, it was announced that the government would rescue AIG with an $85 billion loan. The company was on the verge of collapse because its financial products division had made some risky and complex investments that had gone bad.
The new trouble arises, by contrast, from its insurance companies.
Those companies normally take in premiums and invest them in investment grade securities.
The insurance companies then lend many of those securities to brokers and dealers. In return, the securities brokers and dealers give the insurance companies cash as collateral. They also pay fees on the transaction.
During the market turmoil, many of the brokers and dealers are returning the bonds and requesting their cash collateral back. That has left the insurance companies short of cash.
The collateral for the new cash infusion from the government is considered safer than that for the previous $85 billion because it consists of corporate bonds that are considered less risky.
This cash infusion comes a day after angry lawmakers criticized AIG for its spending habits during a House hearing.
Among other things, AIG is paying one of the executives who led the company into some of its most costly mistakes $1 million a month as a consulting fee to help it unwind his bad investments. And just a week after the first bailout, the company treated some of its executives and some high-performing life insurance agents to a weeklong stay at the pricey St. Regis Resort in Monarch Beach, Calif. Total cost for the spree: $440,000.
"It's pretty despicable," White House press secretary Dana Perino said of the resort trip.