By Jason Simpkins
American International Group Inc. (AIG) will receive as much as $30 billion government aid after posting a $61.7 billion fourth-quarter loss, the largest loss ever by a public company.
In addition to receiving $30 billion in government capital, AIG will benefit because the U.S. Treasury Department will relax the terms on loans it provided the insurer last year. This marks the third time since last September that the government has had to rescue AIG, which the government has deemed a "systematically significant failing institution."
The federal government acquired an 80% stake in AIG last September, stepping up with an $85 billion rescue package. But authorities were forced to bail out AIG again in November after the company posted a $24.5 billion third-quarter loss and struggled to sell enough assets and subsidiaries to repay its original government loan.
The government restructured the terms of the original relief package by slashing the amount owed from the initial $85 billion loan to $60 billion. It also replaced a separate $37.8 billion loan to the insurance company with $52.5 billion in aid and made $40 billion of new capital from the U.S. Treasury's $700 billion Troubled Asset Relief Program (TARP) available to purchase the AIG's toxic assets.
"Counterparties around the world continue to have significant exposure to AIG, and market conditions continue to be fragile and sensitive to the potential disorderly failure of AIG," the U.S. Federal Reserve said in November.
AIG serves businesses and individuals in more than 130 countries and jurisdictions. Its operations extend beyond providing life and retirement insurance, to financial services and asset management, and protection against terrorist attacks. Banks relied on AIG to back more than $300 billion in assets through derivative contracts as of Sept. 30, according to Bloomberg News.
Those derivatives essentially serve as a kind of insurance against losses on other financial assets or agreements. Were AIG to fail, the fallout would be widespread.
AIG wrote down $25 billion in assets in the fourth quarter and took a charge of $21 billion related to taxes. Costs associated with repaying the government totaled about $7 billion. The company lost a total of $99.3 billion last year.
AIG claims that interest paid to the government through preferred shares and pressure to sell off its business units has worsened the company's position.
"You can't sell many assets in this market today," former AIG chief Maurice Greenberg said last month. "You can't sell parts of AIG around the world, because companies don't have any money and you'll never get fair value for what you're trying to sell. That is not the solution."
Greenberg said the government should reduce its ownership of AIG to 15% or less, and the loan should be extended so "that you're not trying to pay it off in a quick period of time, because you can't."
The government has agreed to accept lower interest rates on loans to the insurer and will exchange $40 billion in preferred stock for non-cumulative preferred shares that "that more closely resemble common equity," the Treasury said in a joint statement with the U.S. Federal Reserve. AIG was paying 10% dividend on the government's preferred stock. It pays nothing for common shares.
AIG will repay as much as $26 billion in existing loans from the Fed with preferred interests in two AIG subsidiaries, American Life Insurance Company and American International Assurance Company Ltd.
AIG must also "adhere to the most stringent limitations on executive compensation as required under the newest amendments to the Emergency Economic Stabilization Act," the Fed's statement read. "Additionally, AIG must continue to maintain and enforce newly adopted restrictions put in place by the new management on corporate expenses and lobbying as well as corporate governance requirements."
U.S. stocks were pounded, as the news about AIG stoked fears that the global financial crisis continues to grow. The Dow Jones Industrial Average fell nearly 300 points, or 4.2%, to close at 6,763.29 – it's lowest level since 1997. The Standard & Poor's 500 Index dropped 4.7%, while the tech-laden Nasdaq Composite Index was off 4%.
News and Related Story Links:
- Federal Reserve:
U.S. Treasury and Federal Reserve Board Announce Participation in AIG Restructuring Plan
- Money Morning:
AIG to Seek More Government Assistance as it Braces for a $60 Billion Quarterly Loss.
Emergency Economic Stabilization Act of 2008.