AIG: Bailed out again
Fed restructures loan and creates 2 programs to rescue insurance giant from bad bets. Treasury buys $40 billion in shares. AIG quarterly loss: $25 billion.
By David Goldman, CNNMoney.com staff writer
Last Updated: November 10, 2008: 6:47 AM ET
NEW YORK (CNNMoney.com) -- Troubled insurer American International Group got a new, $150 billion deal from the federal government on Monday, as the Federal Reserve and Treasury Department made significant changes to the terms of the company's original bailout.
The Fed announced that it will reduce AIG's original $85 billion bridge loan to $60 billion, and it will reduce the interest rate by 5.5 percentage points.
In addition, the Treasury will use its special authority under last month's $700 billion bailout law - the so-called Troubled Asset Relief Program - to purchase $40 billion in preferred stock.
"This restructuring will improve the ability of the firm to execute its asset disposition plan in an orderly manner," Treasury said in a statement.
The Fed will also create a new program that will purchase up to $22.5 billion of AIG's troubled mortgage-backed securities, and post $30 billion to backstop its credit default swap agreements, taking place of the $37.8 billion lending facility it previously offered the company.
Also on Monday, AIG reported that it lost $24.5 billion, or $9.05 per share, in the third quarter. Excluding one-time charges, AIG lost $9.2 billion, or $3.42 per share, in the three months ended Sept. 8. That compares to a gain of $1.35 per share during the same period a year ago.
The giant insurer, which has more than 100,000 employees worldwide, reported revenue of $11.7 billion, down 0.8% from the $11.8 billion the company reported in the third quarter of 2007.
The new bailout marks a stunning turn in the Bush administration's efforts to address the escalating financial crisis. It is likely to stoke calls from those advocating for federal rescue plans for other troubled companies such as automaker General Motors, which said Friday it was running dangerously low on cash.
AIG has come under fire from lawmakers and state officials for seeking to make big payouts to former executives and planning pricey corporate events after receiving the federal loans.
As part of the new deal announced Monday, Treasury will limit "golden parachutes" for AIG executives and freezing the size of the annual bonus pool for the top 70 company execs.
In mid-September, AIG teetered on collapse, pressured by the effects of the credit crisis. Worried that the company's failure would domino through the rest of the financial system, the government provided AIG with an $85 billion bridge loan. Later, the Fed gave the insurer $37.8 billion line of credit, and made available $20.9 billion in a debt purchasing facility.
The company has recently said the high interest rate on the original loan is too punitive, and AIG is having trouble selling off its subsidiaries in order to pay back the loan. Furthermore, the company's investors continued to demand the insurer post collateral to back its credit default swap agreements, forcing AIG to borrow more and more from the government.
Edward Liddy, who was installed as AIG chairman and CEO after the government's September rescue, said in a statement Monday that the new deal establishes "a durable capital structure" for the company.
"Today's actions send a strong signal to our policyholders, business partners and counterparties that AIG is on the road to recovery."
First Published: November 10, 2008: 6:33 AM ET
Find this article at: http://money.cnn.com/2008/11/10/news/companies/aig/index.htm