The US Federal Reserve hiked its support for insurer American International Group to about $150 billion (95 billion) on Monday after an initial bailout attempt failed to stem massive losses.
Under the new plan, the government is putting $150 billion at AIG’s disposal, $27 billion more than it extended previously. But the new package will leave the government exposed to billions of dollars of potential losses. AIG shares rose 24% to $2.62 in premarket trade after the new rescue plan was disclosed. The restructured bailout was announced as AIG posted a $24.47 billion Q3 loss, the largest in the company’s 89-year history, hurt by massive losses on investments and billions of dollars of insurance claims from hurricanes that battered the US Gulf Coast earlier this year.
The Fed will buy $40 billion of AIG preferred shares through the US Treasury’s Troubled Asset Relief Program (TARP), lend it $60 billion under a credit facility, and provide $50 billion to buy distressed securities and backstop AIG’s securities lending portfolio. The new plan is nearly double the government’s initial $85 billion rescue plan for AIG, forged on September 16. The government said its equity stake in the insurer would still be about 80%. The preferred shares will carry a dividend of about 10%. The US will charge a lower interest rate on its loan to AIG.
AIG, once the world’s largest insurer by market value, received the $85 billion bailout financing from the government in September after counterparties and rating downgrades forced the company to post large amounts of collateral for credit derivatives positions. Last month, $37.8 billion in additional federal funds were put at its disposal under a securities lending agreement. The new plan replaces both of those facilities.
On Monday, the Fed lowered the interest rate on AIG’s credit facility to three-months LIBOR plus 3 percentage points from the current LIBOR plus 8.5 percentage points, and extended the term of the loan to five years from two years. The Fed said in a statement, “These new measures establish a more durable capital structure, resolve liquidity issues, facilitate AIG’s execution of its plans to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the US government and taxpayers.”
AIG chief executive Edward Liddy said the terms of the new bailout “create a durable capital structure that will make possible an orderly disposition of certain of AIG’s assets” and assure taxpayers are repaid in full with interest. Credit default swap agreements have led AIG to record $18 billion in losses over the past three quarters. Mounting collateral calls left it severely short of cash.
The US Treasury said its $40 billion investment would subject AIG -- which it called a “systemically important company” -- to the same curbs on executive bonuses and golden parachutes as other financial institutions that receive government capital injections. AIG reported a Q3 net loss of $24.47 billion, or $9.05 a share, compared with a year-earlier profit of $3.09 billion, or $1.19 a share. A year ago, AIG’s stock was trading at about $57. It closed at $2.11 on Friday, off an all-time low of $1.25 in the hours before the federal government stepped in with the initial $85 billion loan. (Reuters)