Chillin' out till it needs to be funded
Fed, Treasury revamp AIG supportNew package unveiled as insurance giant posts $24.5 billion quarterly loss
By Sam Mamudi & Rex Nutting, MarketWatch
Last update: 10:20 a.m. EST Nov. 10, 2008Comments: 142New York (MarketWatch) — The Federal
Reserve and the U.S. Treasury have brought new powers to bear as they restructure government support for American International Group, the insurance giant taken over on Sept. 16.
The new plan unveiled Monday calls for the Treasury to invest $40 billion in preferred shares of New York-based AIG (AIG 2.51, +0.42, +20.1%) and for the Fed to create two new lending facilities to help AIG remove toxic assets from its balance sheet.
The government’s announcement signals a shift away from the original plan — an $85 billion loan to AIG, the amount of which was later increased to $123 billion. The new plan also contains a $60 billion loan.
Senior Fed officials said that the new plan is possible because of broader powers granted the government — to buy shares in companies and purchase toxic assets — as part of October’s sweeping bailout package. Shares of AIG rallied in early trading, reaching as high as $2.84, and lately changed hands at $2.54, up 20%.
The Treasury will impose stricter compensation rules on AIG than it has on banks participating in the government’s Troubled Asset Relief Program. The top 70 officers at AIG — not just the top five — will be subject to golden-parachute restrictions and have their bonus pool frozen. The $40 billion investment will pay down the existing Fed debt.
Meanwhile, the Federal Reserve Bank of New York will lend a combined $52.5 billion to two limited-liability companies that will take over residential mortgage-backed securities and collateralized debt obligations from AIG. The company will take the first $6 billion in losses from the assets. The assets moved to the companies were marked to market on Oct. 31, said Fed officials.
One of the two new companies will buy the residential mortgage-backed securities using $22.5 billion in Fed loans. AIG will cover the first $1 billion in losses from the portfolio. The other company will buy up to $30 billion in multi-sector collateralized debt obligations on which AIG had written credit-default-swap contracts, with counterparties then unwinding the swaps transactions. AIG will bear the first $5 billion in losses from this portfolio. The Fed loan to the two companies will carry an interest rate based on the one-month Libor rate plus 100 basis points, the equivalent of one full percentage point.
The limited-liability companies are similar in structure to the one that the Fed created to buy some assets from failed investment bank Bear Stearns when it was sold to J.P. Morgan Chase & Co. Fed officials said that the decision to set up the two companies was taken to help prevent future losses at AIG.
Terms of the revised agreement also call for the Fed to reduce the interest rate it charges AIG from the three-month Libor rate plus 850 basis points to three-month Libor plus 300 basis points.
“These new measures establish a more durable capital structure, resolve liquidity issues, facilitate AIG’s execution of its plan to sell certain of its businesses in an orderly manner, promote market stability and protect the interests of the U.S. government and taxpayer,” the Fed and Treasury said.
The total value of the new plan, about $150 billion, represents the largest government support package extended to a private company in U.S. history.
Following the announcement of the new plan, Fitch Ratings said it has affirmed its ratings for AIG — AA-category IFS ratings and A-rated senior unsecured debt ratings — and removed AIG from its Ratings Watch Evolving list.
Also Monday, the company reported a third-quarter loss of $24.47 billion, or $9.05 a share. It earned $3.09 billion, or $1.19 a share, in the year-earlier period.
AIG said the latest quarter’s results reflected restructuring, financial dislocation in global markets and catastrophe losses.
Excluding $15.1 billion of capital losses, AIG would have reported a $9.24 billion quarterly loss. The adjusted AIG loss of $3.42 a share was worse than analysts’ consensus of 85 cents a share, according to estimates compiled by FactSet Research.
Sam Mamudi is a reporter for MarketWatch in New York.
Rex Nutting is Washington bureau chief of MarketWatch.