American International Group posted a record $61.7 billion quarterly loss on Monday and got a new but not necessarily final government bailout after officials concluded again that letting the insurer fail would threaten the world financial system.
AIG will get access to up to $30 billion of new capital, after getting a commitment for $150 billion in aid last year that gave the government a stake of nearly 80%.
The latest bailout avoids for now any crippling credit rating downgrades that could force AIG to come up with billions of dollars it might not have.
The new rescue agreement increases the government’s commitment to keeping AIG on life support. The deal was announced just three days after the government announced a new bailout for Citigroup, which like AIG has struggled to sell businesses and raise cash to pay back bailout funds. Both companies are based in New York.
The market is “a pretty crummy place” right now, AIG CEO Edward Liddy lamented on a conference call. He said fixing AIG could take “several years.”
In agreeing to a new AIG bailout, the Treasury Department and the Federal Reserve cited AIG’s operations in more than 130 countries, its role as an insurer for more than 100,000 entities including operations that employ more than 100 million Americans, and its more than 30 million US policyholders.
The government also acknowledged that Monday’s bailout might not be AIG’s last. “Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high,” the government said in a statement.
AIG’s Q4 loss of $22.95 per share widened from $5.29 billion, or $2.08 per share, a year earlier. Most of the loss stemmed from big writedowns tied to credit default swaps and other toxic debt. The latest loss equaled about $465,000 a minute, and was a record for a US company, according to Thomson Reuters data.
For all of 2008, AIG lost $99.29 billion, wiping out profit dating to the early 1990s. That amount is close to the gross domestic product of Kuwait. AIG built up its exposure to swaps earlier this decade, when long-time CEO Maurice “Hank” Greenberg and then Martin Sullivan were running the company. Swaps were underwritten at the AIG Financial Products unit, run by the London-based executive Joseph Cassano.
“What’s really overhanging the market is AIG -- we gave them all that money and they are obviously still bleeding terribly,” said Warren Simpson, managing director at Stephens Capital Management in Little Rock, Arkansas.
The new bailout gives AIG more lenient terms on existing financing. AIG will convert some debt into a preferred equity stake for the government in its American International Assurance Co and American Life Insurance Co units, which each have significant Asian operations. AIG also announced plans to spin off part of its property-casualty business, to be renamed AIU Holdings. It said it believes it has enough liquidity for the next year.
In agreeing to a new bailout, the Treasury and Fed cited AIG’s operations in more than 130 countries, its role as an insurer for more than 100,000 entities including operations that employ more than 100 million Americans, and its more than 30 million US policyholders.
The government also acknowledged that the bailout might not be AIG’s last. It said fixing the insurer “will take time and possibly further government support if markets do not stabilize and improve.” AIG’s roots date back 90 years to China where founder C.V. Starr, a US entrepreneur, set up a small insurance agency.
The government appointed Liddy, a former CEO of Allstate, to run AIG in September. On the conference call, Liddy said AIG had become "too complicated, unwieldy and opaque" to operate as it has.
NOWHERE ELSE TO TURN
Donn Vickrey, an analyst with independent research firm Gradient Analytics in Scottsdale, Arizona, said the government commitment to AIG may ultimately reach a quarter trillion dollars, much of which it may not recoup.
“AIG really has nowhere else to turn,” he said. “Taxpayers are stuck with trying to unwind it slowly over time. Hopefully there will be something left over at the end.” Major credit rating agencies affirmed AIG’s ratings, which fall in the ‘single-A’ category, a medium investment grade.
Moody’s Investors Service analyst Bruce Ballentine said he expected the government “will provide incremental support as needed to ensure that AIG can meet its obligations through this period of severe economic recession and market turmoil.” (Reuters)