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What Does the Latest Federal Bailout Mean for AIG?

March 03, 2009 07:30 AM
by Anne Szustek
In exchange for a $30 billion bailout, AIG agreed to hand over control of two of its divisions to the U.S. government. The agreement marks the company's third federal bailout in five months.

Bailout Number Three for AIG

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The U.S. government will take over two divisions of insurance conglomerate AIG: a $26 billion stake in American International Assurance, which oversees the company's extensive Asian operation and global life insurance unit American Life Insurance Company. The action marks  AIG's third taxpayer-funded bailout in five months.

A joint statement by the U.S. Treasury and the Federal Reserve refers to AIG as a "systemic risk" to the stability of the financial system as a whole, and asserts that "The long-term solution for the company, its customers, the US taxpayer, and the financial system is the orderly restructuring and refocusing of the firm."

The new government action "makes it even less likely that AIG will be able to raise enough for payback," surmises The Wall Street Journal's Deal Journal blog.

AIG reported on Monday that it had posted $61.7 billion in losses during the fourth quarter of 2008—the largest ever loss in U.S. corporate history—which pushes up its total losses for last year to near $100 billion.

AIG's November bailout package involved the U.S. Treasury using some of the funds from the $700 billion bailout package to buy up $40 billion in AIG preferred stock.

This latest round of government intervention is to have this tranche of preferred stock exchanged for a fresh tranche of preferred shares that bear a resemblance to common stock and is set to release new preferred shares on Wednesday, making the government's AIG stake some 77.9 per cent.

The November bailout also lowered the government's loan to AIG to $60 billion from $80 billion and a plan to extend $30 billion for AIG from the Troubled Asset Relief Program, also known as TARP or colloquially as the "bailout bill," to buy up collateralized debt obligations, or CDOs, which largely plunged in value on the back of defaulted mortgages.

Background: The downfall of AIG

The March 2 bailout lowers the minimum interest rate on the $60 billion credit lending facility opened in November, protecting the government in case the LIBOR benchmark interbank lending rate should drop.

It also makes available another $8.5 billion in loans to AIG's domestic subsidiaries, as well as cut down the amount available to the insurance company under the original lending facility to at least $25 billion.

The Federal Reserve lent $85 billion to AIG in September, which effectively nationalized most of the company. On Oct. 8, less than a month later, the insurer got another $37.8 billion in loans, prompting concerns over exactly how much money the company will need to stay afloat.

Going into March, the scrutiny hasn’t stopped. As taxpayer money is keeping AIG from collapse, some are calling for more disclosure into exactly where the money is going.

For example, an October congressional hearing uncovered the information that AIG’s primary life insurance company spent $440,000 on a luxury California spa vacation a few days after receiving the September loan. Such revelations haven’t helped AIG’s public image.

Reference: Preferred stock

Related Topic: U.S. government buys up Citigroup preferred stock

The U.S. Treasury agreed to raise its ownership of Citigroup from 8 percent to approximately 36 percent on Friday as part of its third attempt since October to keep the behemoth financial institution afloat.

Citigroup, once the nation’s largest bank, is putting payment of dividends on common and preferred stock on hold, and will exchange common stock for up to $27.5 billion in preferred stock at a conversion price of $3.25 a share, a 32 percent premium over Citigroup’s Thursday closing share price of $2.46. The government is to match this conversion, up to $25 billion, in government-held preferred shares into common equity under the TARP's Capital Purchase Program.
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