AIG Close to Getting New, Larger Bailout
Monday, November 10, 2008
The federal government was finalizing a new plan last night to rescue American International Group from financial ruin after it became clear that the original bailout, launched in September, had failed to stabilize the insurance giant, according to sources familiar with the plans.
Government officials said the Treasury Department intended to announce the new initiative early this morning, before AIG was scheduled to report its earnings for the third quarter.
Treasury first tried to prevent AIG from going bankrupt as a result of its disastrous bets on real estate investments by offering the company an $85 billion loan at relatively high interest rates. That loan has since grown to $143 billion.
The government is proposing a $150 billion rescue package on easier terms that would get federal officials more involved in AIG but aims to reduce the strain on the company. The new deal would give AIG more time to repay the loan, which could increase the chance that AIG settles its debt without emerging as a shell of its former self.
First, under this arrangement, the original $85 billion loan would shrink to $60 billion and could be repaid over five years, two sources said. The loan's interest rate would fall from a high of 14 percent to 8.5 to 10 percent, reducing the need for AIG to sell off business divisions and assets at fire-sale prices to rapidly repay the government.
Second, and most critically, the government has now agreed to spend $30 billion buying troubled real estate investments that AIG had guaranteed and that were the cause of the company's near-failure. AIG would contribute another $5 billion to this pool. With this money, the government would buy securities with a face value of $70 billion. Sources said officials hope the government could hold these investments long enough that the underlying mortgages and assets recover some of the value.
After the Federal Reserve of New York first extended the $85 billion loan to AIG on Sept. 16, the company quickly began burning through the funds. Twice, the government had to increase the sum -- to $123 billion in early October, then to $143 billion at the end of last month. Each week, AIG was tapping billions from the government fund to post collateral for banks and other firms whose mortgage investments AIG had promised to insure. The firms were demanding greater collateral because of AIG's declining credit rating, as well as the rapidly falling value of the mortgage investments themselves.
But when the company sought to sell assets that would help it repay the federal loans, it wasn't finding many takers. This was making AIG's management increasingly anxious about whether it would be able to meet the interest payments.
A third component of the new deal would entail the government buying $40 billion in preferred shares of AIG as securities for taxpayers. The AIG board was considering the plan last night.
"It's a very, very positive development for AIG and taxpayers, because now the company has a realistic chance of paying the taxpayer back," said an official close to the renegotiation talks. News of a restructured deal was reported yesterday evening by the Wall Street Journal.
The Federal Reserve of New York and the Treasury Department declined to comment last night on the plan.
Staff writer David Cho contributed to this report.