Government Again Expands AIG Rescue Plan
Tuesday, November 11, 2008
The federal government announced a new, more expensive rescue yesterday of American International Group, becoming more enmeshed in the troubled insurance giant's business, as the company disclosed massive losses over the past three months.
The plan expands the current government bailout program for the third time -- from $123 billion to $152 billion. More significantly, it dramatically restructures the rescue to make it easier for AIG to repay U.S. taxpayers, and gives the company the gift of time to weather its financial storm.
Under the new plan, the government will buy $40 billion of AIG preferred stock, much as the government injected cash into major U.S. banks last month to partially nationalize them. As it did for banks, the government will tap its new $750 billion Troubled Asset Relief Program (TARP) to invest directly in AIG.
An additional $52.5 billion in government money will be used to take troubled assets -- most of them mortgage-related investments the company either held or insured for other firms -- off the company's books.
A previous $85 billion loan fund will be cut to $60 billion. But the government's interest rate will drop from 14 percent to as low as 5 percent, and AIG can now repay the money in five years rather than two.
Treasury and Federal Reserve officials privately acknowledged yesterday that their original effort to save AIG from bankruptcy -- hastily stitched together on Sept. 16, immediately after Lehman Brothers went broke -- had, in fact, been weighing down the company. The original deal strained AIG by requiring quick repayment of a high-cost loan, and rapid asset sales that were yielding fire-sale prices in a panicked market.
"From everybody's point of view, this is a much better rescue effort," said Donald Light, senior analyst at Celent, a Boston-based financial research firm. "Whether Bailout II works is another question. But it's clear that Bailout I was already failing."
Former AIG chief executive Maurice R. "Hank" Greenberg, a major critic of the first bailout's burden on the company, said he is glad the deal was restructured so AIG had a better shot at repaying. The company could have owed $22 billion in interest at the end of two years, he said.
"Are they out of the woods yet? I wouldn't say so," Greenberg said yesterday. "But they can see a little more daylight than they did earlier."
Federal officials announced the new AIG rescue plan at 6 a.m. yesterday -- shortly before the company reported that it had lost $24.5 billion from July through October. AIG has now posted losses of $37.6 billion for the first nine months of the year, but the news of a fresh bailout sent AIG stock up 12 percent in afternoon trading.
The reason for AIG's near-collapse was primarily its disastrously bad bets on real estate investments. The world's largest insurance company had sold protection, called credit default swaps, for $441 billion in investments that other firms held, including $58 billion tied to subprime mortgages. But as the value of those investments plummeted and AIG's credit rating fell, its swap clients demanded the company provide billions in collateral to pay off AIG's bad bets.
"We cannot continue to hemorrhage cash in posting collateral for credit default swaps," AIG chief executive Edward Liddy said on a conference call with analysts yesterday. "We need to stop that, and we need to stop that now."
Presumably the government will be able to hold the troubled assets long enough for them to recover their value, unlike the private companies. The taxpayers will share in the gains if the assets rebound. But Light and other analysts questioned whether the original companies that paid AIG protection will be willing to sell at the government's offering price -- 50 cents on the dollar.
"If you think those assets are worth 25 cents now, you might be very happy to sell," Light said. "If you think they are worth 65 cents, you may not."
The enhanced bailout plan -- nearly double the original $85 billion loan extended to the company in September -- comes with the tightest restrictions yet on how much AIG corporate executives are paid. The top five executives at the company are prohibited from receiving any golden parachute payments during the bailout. The next 70 highest-ranking corporate officials are also subject to limits on severance packages that apply to other executives of companies participating in the $750 billion TARP.
The use of TARP money to help AIG comes as federal officials weigh how far to expand the program beyond its original aim of removing troubled mortgage assets from the books of banks and financial companies. About a third of the fund already has been set aside for direct capital investments in banks, and there have been demands that the program be expanded to include troubled companies outside the financial industry, such as U.S. automakers.