Monday, March 2, 2009

U.S. To Loan AIG An Additional $30 Billion

The federal government will loan American International Group Inc. an additional $30 billion and loosen significantly the terms of its earlier aid to the company, AIG said today.

The decision, which follows a series of loans and stock purchases by the government totaling $150 billion, came as the insurance giant announced a record-setting $61.7 billion quarterly loss.

Government officials and company executives worked throughout the weekend in consultation with the ratings agencies to make the deal.

"Given the system 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 Treasury Department said in a press release announcing the latest restructuring plan.

AIG provides insurance to more than 100,000 small businesses, municipalities, Fortune 500 companies and other entities that collectively employ more than 100 million Americans, the Treasury Department noted.

The company has more than 30 million policy holders in the United States. It also is a counterparty in transactions with a number of major financial institutions -- including some of the other companies that have received billions in taxpayer capital through the Treasury Department's Troubled Asset Relief Program (TARP).

Under the terms of the new agreement, the government will make available to AIG an additional $30 billion in TARP money, though the company is not expected to take the funds immediately.

To help AIG conserve cash, the government also agreed to change some of the terms of its earlier agreements. Under the new terms, $40 billion in preferred non-voting shares the government bought to help recapitalize the company would be converted into shares that don't require a 10 percent dividend payment. The arrangement would save AIG $4 billion a year.

The deal also includes the government's agreement to lower the interest on its debt to the London Interbank Offered Rate (LIBOR), a decrease of 3 percentage points that could save AIG an additional $1 billion a year. In addition, the government agreed to convert some of its debt into equity in two AIG subsidiaries in Asia, American International Assurance and the American Life Insurance Co.

Whether any of these arrangements will pay off for American taxpayers is unclear. AIG has been trying to sell its Asian subsidiaries for some time now, and critics say that the fact that the U.S. government is buying shares in them now suggests they did so at pricier terms than private investors were willing to give.

In addition, none of these agreements touched on AIG's ongoing dispute with the Internal Revenue Service over a $316 million charge related to controversial tax arbitrage transactions. The Wall Street Journal reported today that AIG sued the federal government on Friday over the issue, a move that the paper said "highlights the awkwardness of national control of AIG."

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