AIG Said To Receive Access to More Cash
Monday, March 2, 2009
American International Group will gain access to $30 billion more in taxpayer money as part of another restructuring of its federal bailout, sources involved in the negotiations said yesterday. It marks the fourth time the government has stepped in to help the ailing insurance giant since September.
The reworked plan is aimed in part at helping AIG avert a potential disaster as it announces the biggest quarterly corporate loss in history this morning -- more than $60 billion for the fourth quarter of 2008, according to sources who spoke on condition of anonymity because the results had not yet been released. The government reaction is rooted in the idea that a collapse of AIG, which has ties to nearly every major financial institution in the world, would endanger the entire economy.
Credit-rating agencies would have likely downgraded AIG in the face of such staggering losses, sources said, burying the company in a wave of new debt and possibly sending it into bankruptcy protection.
But the commitment of new funds from the Treasury Department's Troubled Assets Relief Program is meant to demonstrate that AIG can make good on its public and private debts and that the company could return to viability.
"It buys time," said one source involved in the discussions, who added that credit-rating agencies were consulted on the deal. Though AIG isn't expected to access the money immediately, it now has access to $70 billion in TARP funds, about 10 percent of the financial system bailout approved by Congress.
The additional federal money is one part of the restructuring that AIG's board of directors approved yesterday. As part of an effort to pay back its outstanding Federal Reserve loan, AIG will give the government equity stakes in two of the company's crown jewels, Asian-based American International Assurance Co., and American Life Insurance Co., which operates in more than 50 countries. Each subsidiary will be placed in a separate trust, with the government given preferred shares and paid a likely 5 percent dividend. AIG will continue to operate the companies, however, and eventually could sell or take them public.
In addition, the revamped deal allows AIG to free itself from some of the dividends it previously had to pay the government on its preferred shares, a move that will save billions annually. The government also has agreed to purchase a sizable chunk, or securitization of AIG's domestic life insurance business for $7 billion $10 billion, sources said. It could then choose to sell that business or simply keep the steady income it provides. Company officials also plan to combine AIG's domestic and foreign property-casualty units into a single operation, with new leaders and a new name, and potentially to sell 20 percent in a public offering.
The reworked bailout package acknowledges that AIG's strategy of selling two-thirds of its assets to pay back the government within two years was not working. In recent months, the market for those assets continued to plummet as the economy worsened, and already-hesitant buyers were facing their own credit problems.
"This expands the number of options," said one source involved in the restructuring. "Alternatives are a good thing."
The new deal, however, will leave the federal government more deeply intertwined with AIG, all but assuring that taxpayers will remain involved with the company for years. It will expose taxpayers to increased risk over the long term, as AIG's assets fluctuate in value.
But sources close to the negotiations said AIG still poses a very real risk to the global financial system, and that its demise would have proven far more costly to taxpayers than will the sizable government investment. In addition, an AIG bankruptcy would almost certainly cause massive disruptions throughout the insurance world, upending the company's 74 million policy holders and causing more economic turmoil in the more than 100 countries where it operates.
The government largely nationalized the company in September when the Fed extended an $85 billion emergency loan and took an 80 percent stake in the company. At the time, the collapse of Lehman Brothers investment bank had left markets reeling, and AIG was teetering on the edge of bankruptcy in large part because of a troubled portfolio of exotic financial derivatives written by a subsidiary.
Two months later, with the company still reeling, the government changed and expanded the terms of the bailout to potentially $150 billion. The government announced in November that it would buy $40 billion of AIG preferred stock, with money from TARP funds. It spent another more than $50 billion to buy up troubled assets -- mostly toxic mortgage-related investments that the company either held or insured for other firms -- that were wreaking havoc on the company's books. It eased the terms of the initial loan to $60 billion, dropped its interest rate from 14 percent to as low as 5 percent, and extended the payback time to five years rather than two.
And yet, none of that proved quite enough for the insurer, whose stock closed Friday at $0.42, from its peak of more than $100 in late 2000.
"It's like triage. Band-Aids all over the place," said Bill Bergman, an analyst with Morningstar in Chicago. "I think it's a lost cause already. Maybe we're forestalling even bigger consequences by trying to keep it alive."