N.Y. Fed to Trim AIG Debt, Receive $25 Billion Stake in Two Subsidiaries

AIG chief executive Edward M. Liddy testifies on Capitol Hill in May. He said yesterday the deal with the Federal Reserve will preserve company value.
AIG chief executive Edward M. Liddy testifies on Capitol Hill in May. He said yesterday the deal with the Federal Reserve will preserve company value. (By Susan Walsh -- Associated Press)
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By Brady Dennis
Washington Post Staff Writer
Friday, June 26, 2009

American International Group announced yesterday that it has reached a deal to reduce its debt to the Federal Reserve Bank of New York by $25 billion.

The troubled insurance giant, which has received multiple federal bailouts since September, said that it would give the New York Fed preferred stakes in two of the company's crown jewels -- Asian-based American International Assurance, or AIA, and American Life Insurance Co., or Alico, which operates in more than 50 countries.

Under the agreement, AIG will split off AIA and Alico into separate company-owned entities called "special purpose vehicles," or SPVs. The New York Fed will receive preferred shares now valued at $25 billion -- $16 billion in AIA and $9 billion in Alico -- and in exchange will forgive an equal amount of AIG debt.

Even after the transactions, which AIG said it expects to close during the second half of 2009, the company will owe the New York Fed approximately $15 billion.

AIA and ALICO would remain wholly owned subsidiaries of AIG, and the insurance giant would continue to operate them. The company plans to eventually take the units public.

Edward M. Liddy, AIG's chief executive, said in a statement that the agreement "represents a major step toward repaying taxpayers and preserving the value of AIA and Alico."

The New York Fed said in a statement that the agreements "further the goals of enabling AIG to fully repay the assistance that it has received from U.S. taxpayers and advancing the company's global restructuring process. The exchange of senior secured debt for preferred equity interests reduces AIG's financial leverage and facilitates the independence of these two key subsidiaries."

AIG first signaled its intent to offer the government stakes in AIA and Alico on March 2, the same day that the company posted a staggering $62 billion loss for the final quarter of 2008 and nearly $100 billion for the year. It was part of an overall effort to restructure its federal bailout, which had grown since its initial rescue in September and now stands at a total taxpayer commitment of about $180 billion, which includes cash infusions and government asset purchases.

AIG has continued to shed assets to help raise money to pay back the government, even as the company has often had trouble finding buyers amid falling values and tough lending conditions.

In recent months, it has announced the sale of consumer finance operations in Mexico and Argentina, as well as much of its stake in a global reinsurance operation. It also has sold some of its real estate, include its Tokyo headquarters and its main headquarters in Lower Manhattan.

As it seeks to become a smaller, more viable company, AIG also faces an imminent shakeup among its top leaders.

Last month, Liddy, who took the reins after the government's bailout last fall, said he would step down as chairman and chief executive, though he plans to remain until the company names a replacement. The next chief executive will be AIG's fifth since 2005.

In addition, a majority of directors on AIG's board are likely to be replaced Tuesday when the company holds its annual shareholders meeting. Their replacements have been selected by three federally appointed trustees charged with representing the 80 percent taxpayer stake in the company.

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