Aid package for AIG
grows to $150B

WASHINGTON/NEW YORK—The government restructured its bailout of American International Group Inc., raising the package to a record $150 billion with easier terms, after a smaller rescue plan failed to stabilize the ailing insurance giant.

The Federal Reserve and the Treasury Department announced the new plan on Monday as AIG reported a record third-quarter loss of $24.47 billion, largely from write-downs of investments.

The new package, at least $27 billion more than was previously extended, will leave the government exposed to billions of dollars of potential losses.

AIG, once the world’s largest insurer by market value, nearly collapsed after being forced to post large amounts of collateral related to exposure to complex derivatives known as credit default swaps.

Many of these securities were linked to the performance of residential mortgages, and lost value as the US housing downturn mushroomed into a global credit crisis.

"We cannot continue to hemorrhage cash in the two areas of securities lending and credit default swaps," chief executive Edward Liddy said on a conference call. "We need to stop that, and we need to stop it now."

Under the new plan, the government will get a $40 billion equity stake in AIG, spend as much as $30 billion on securities underlying the insurer’s credit default swaps, and spend up to $22.5 billion to buy residential mortgage securities.

It will also reduce a previously announced credit line to $60 billion from $85 billion, and lower interest rates on borrowings. AIG will also accept curbs on executive pay, including a freeze of bonuses for its top 70 executives.

"The restructured bailout should give AIG the flexibility to sell assets in an orderly manner for closer to their intrinsic values rather than fire-sale prices," CreditSights Inc analyst Rob Haines said. "Moreover, we believe that it will help to restore confidence in AIG’s global franchise."

Shares of AIG were up 26 cents, or 12.3 percent, at $2.37 in afternoon trading on the New York Stock Exchange. The cost of protecting AIG debt against default declined, indicating that investors see less risk.

AIG will issue preferred shares to the government that carry a 10 percent dividend. The government will maintain its roughly 80 percent stake in AIG, making it the biggest beneficiary of the revised bailout.

In an interview, Liddy said it’s possible the ownership stake could fall as AIG gets its finances in order.

"Once all of this is repaid, and we don’t need that (credit) facility anymore, I think we will have some rather robust discussions about that ownership percentage," he said.

He acknowledged the possibility, though, that even $150 billion might not be enough. "There is more breathing room, but the answer is, ‘What do you think is going to happen to capital markets?’" he said. "Under any normal scenario, I think we are in pretty good shape. But you can never say never."

The $40 billion equity infusion comes from the $700 billion financial bailout package passed into law last month.

That package was originally intended for banks, and AIG is the first company other than a bank to get money from it. It was created after the government announced the original $85 billion bailout package for AIG on September 16.

"Today’s action was a one-off event," Neel Kashkari, the Treasury Department’s interim assistant secretary for financial stability, said at a conference in New York. "It is not the start of a new program."

White House spokeswoman Dana Perino said "AIG, being clearly within that financial service sector, is what Congress had in mind when it passed the rescue package."

She called AIG "a large, interconnected firm," and said the new package "will allow AIG to continue to restructure themselves in a way that will not hurt the overall economy."

A Treasury Department official said a member of president-elect Barack Obama’s transition team was briefed on the transaction Sunday night.

The $60 billion credit line will mature in five years, while the $85 billion line was set to mature in two years.