Will AIG Be Able to Repay Taxpayers?

Posted by: Nanette Byrnes on November 10, 2008

The government hiked the amount of help it’s giving troubled insurance company American International Group today. Now taxpayers could put out as much as $173.4 billion for the company across five different programs, some of which offer the government some collateral. It’s the latest increase in a series that began Sept.10 when the government extended AIG an $85 billion line of credit.

The move wasn’t based on AIG’s improving performance. The company lost $24 billion in the third quarter, results also announced today.

So is AIG, a company still hemorrhaging remarkable quantities of red ink, going to be able to repay all this?

AIG’s third quarter loss came mainly from marking to market asset declines at its financial products unit, AIGFP, and from major losses in investment income across its insurance units. Also contributing: restructuring costs and catastrophic insurance losses on hurricanes Ike and Gustav. The new deal will help stem the mark-to-market losses, but investment declines and business losses are beyond its scope.

Gradient Analytics analyst Donn Vickrey is worried by losses at AIG’s core businesses including an $899 million loss in its General Insurance unit, excluding investment declines, and a 59% drop in income at is Life and Retirement businesses. Losses at the operating level forced AIG to contribute $26 billion in loans and capital to these subsidiaries and other units have maxed out credit facilities totaling over $11 billion, he notes. “If the operating companies were doing well the parent company would not have had to contribute capital,” Vickrey argues.

Keefe, Bruyette & Woods analyst Cliff Gallant, on the other hand, thought AIG’s insurance businesses performed ok in the quarter, with its international businesses especially strong. What concerns Gallant is the fact that these numbers don’t capture much of the period since AIG really started to hit the ropes. The third quarter ended Sept. 30, less than three weeks after things really started to fall apart for AIG. “The industry wants to see what happens to their market share over the next 2 or 3 quarters,” says Gallant. Especially important: how AIG fares on January 1 when many corporate customers renew policies.

Gallant is also watching whether AIG is able to hang on to its best people, the key conduits to customers and an easy way for competitors to pick off business without having to do a full-on acquisition. On that front, bad news is already starting to mount. Key AIG talent has already walked out the door, reports Business Insurance magazine.

Today’s government deal should increase the chances that AIG can make good on its borrowings. For one thing, it lowers the interest rate on the money AIG has already borrowed. AIG paid $2 billion in interest and fees on that money in the past two months. And gives it longer to pay off, extending the loan’s term from two years to five.

More importantly, the Federal Reserve Bank of New York is helping to fund two entities that will help AIG move off its balance sheet some of the derivatives which have been sucking up its cash. According to AIG’s SEC filings, those two limited liability corporations will take on some of the company’s most toxic residential mortgage backed securities and collateralized debt obligations AIG insured with credit derivate swaps.

That should limit the damage they can do to the insurer in the future, though Gradient’s Vickrey worries that the deal doesn’t cover a whole other category, commercial loan derivatives, that could begin to blow up on AIG next.

AIG will pay off much of its borrowings by selling off pieces of itself, a plan CEO Ed Liddy outlined October 3. Promising to be disciplined about selling AIG’s “remarkable assets”, Liddy said he expects to announce “several key dispositions this year proving good deals can get done in this market place.” But management couldn’t announce a single major asset sale today. Liddy argued that had more to do with the challenges of getting any deal financed in the current credit environment than with AIG in particular.

Reader Comments

Ray

November 10, 2008 8:50 PM

Not before the CEO and top execs get a multi-million dollar payoff, luxurious perks - and let's not skimp on their spa retreats.

Pete

November 10, 2008 9:49 PM

The word a month ago was that taxpayers would "probably make money" on these deals. Yea right - lies, lies and more lies. I'm amazed that our incompetent government is literally throwing around trillions of taxpayer dollars with no real plan. This bank bailout (robbery) is the largest swindle in world history and we sheep are just spectators. The Neocons are building their criminal New World Order on the backs of our debt-ridden citizenry. Socialism lives and breathes in the US. What a shame/sham.

John Siebert

November 10, 2008 9:58 PM

The government, which now owns a portion of AIG, should be monitoring their day to day affairs to protect our investment.

John Siebert
http://www.tranquilblue.com
President

wtbirds92

November 10, 2008 10:18 PM

Someone please tell me why any company or investor would want to do business with an insurance company that can't assess risk?

harco

November 10, 2008 10:34 PM

they damn well better or obama is out in four years or less

Can taxpayers repay AIG creditors?

November 10, 2008 11:46 PM

Can taxpayers pay all AIG debts? I think this may be more appropriate question.

Robert

November 10, 2008 11:52 PM

It is quite interesting how China's bailout solution is so different than what the U.S. is doing. China is to build low-income housing for its citizens, improve roads, utilities and other infrastructure, and build schools, hospitals, dams and develop other important things. China believes this will create jobs and stimulate economic growth enough to ward off recession.

The U.S. on the other hand takes a far different approach. It instead pours what money it has left into its corporations and monied classes, bailing out the largest of them such as AIG, while generally ignoring the masses in the hopes such aid will trickle down to the remainder of the populace. The mentality of the country is such that it cannot even comprehend that such policies are what caused its ailments in the first place.

It is clear who the new global superpower will be in the 21st century. And no it will not be the U.S. if not for a lack of sensibility.

Edward Muich

November 11, 2008 1:49 PM

ISN'T SOCIALISM GREAT?? THE AMERICAN VOTER BETTER WAKE UP AND TELL THE U.S. GOVERNMENT, INCLUDING NEW PRES OBAMA, NO SOCIALISM IS NECESSARY.. LET AIG DIE.. ANOTHER WILL TAKE ITS PLACE AND THE AMERICAN TAXPAYER WILL HAVE MONEY TO EAT ON..AIG EMPLOYEES JUST CAME BACK FROM A BIG PARTY ON OUR TAX MONEY..
ENOUGH IS ENOUGJH.. NO MORE CEO GIFTS
ED MUICH

Holly Garfield

November 11, 2008 3:18 PM

So AIG is moving more toxic assets off the balance sheets? Isn't that what got AIG and a host of others in trouble in the first place? The bailout was done in a hurry. Act in haste, repent at leisure. The AIG bailout is now approaching twice the cost of the stimulus checks last spring, and the stimulus checks worked better.

gary

November 11, 2008 3:52 PM

would this country be worse off without one more insurance co. I doubt it.

Clara

November 11, 2008 5:30 PM

Those AIG people should all lose thier jobs.We are struggling to make ends meet while they are partying on our money.If our government wants to bail someone out how about all of us people out hear who have lost their jobs and are in danger of losing their homes.Those CEO guys are so smug and are laughing all the way to their next Getaway on us!!!!! They should be held accountable maybe even spend some time in a jail cell.Look what they did to Martha Stewart.....She paid the price ......They should have to live on the wages that we do......AIG should be let go..Let them fall.......

Renee

November 11, 2008 5:47 PM

The CEO and top executives should be fired!! They should have to liquidate their assets and pay back the American Tax Payer for their 2 Spa and One Hunting Trips.

If the government gives them one more dime without making them pay back their trips..........WE NEED TO GIVE EVERY DEMO AND REP IN EVERY OFFICE OUT OF WASHINGTON AND START COMPLETELY OVER WITH HARD WORKING AMERICANS WHO KNOW WHAT IT IS TO LIVE WITH A BUDGET OR PAYCHECK TO PAYCHECK.

NO MORE HAND OUTS!!!!! LET GM FILE BANKRUPTCY!! IT IS A NEW DAY

Reality Check

November 11, 2008 9:27 PM

No more taxpayer money for the AIG sinkhole. Let the company perish and send the executives to jail. The only American thing to do is BOYCOTT AIG NOW! Greenberg got them into this mess. Why are people still buying what he's pushing?

marc van basten

November 11, 2008 9:27 PM

Before eastern european countries became comunist, great capitalist societies existed in those places.
But the rednecks got tired of being slaves to the riches and they chose comunism.
when the rednecks get tired of bailing out the CEO's huge compensations of the failing capitalist America, they will head to Washington DC. Hopefully I wont be here when that happens.
Solution...Keep food on the table for those rednecks thus keep America safe for a while. Give them the High Fructose Corn Syrup so they can become diabetes and die of cancer early.
Dumb rednecks!!!
This great country will fall from within.
Plan ahead for an escape route.

Nadine

November 11, 2008 10:42 PM

Print

Rita

November 11, 2008 11:17 PM

Isn't Liddy yet another former Goldman Sachs exec appointed by Paulson to lead AIG through the bailout? The conflict of interests just keep mounting....

r mackie

November 12, 2008 5:52 AM

lol some very misguided people here...

"they damn well better or obama is out in four years or less"

"The Neocons are building their criminal New World Order on the backs of our debt-ridden citizenry. Socialism lives and breathes in the US. What a shame/sham."

what does this have to do with obama being in our out?? ummm nothing?

don't blame socialism - this isn't socialism - this is plain old legalized theft. Bush swindled american's out of ten trillion dollars already, but i guess that wasn't enough to satiate the infinite, unchecked greed of american big business.

Flt Engineer

November 12, 2008 6:17 AM

My fellow Americans, it is with great sorrow that I must inform you that we have all just been HAD. Although there are some who want to blame Obama for this fiasco and hold him totallyb accountable for correcting this fiscal nightmare prior to him even being sworn in, take pause, and just look at who it is before our very eyes that is having a feeding frenzy raping our Treasury. Every greedy scumbag lobbyist is just frothing at the mouth to get his/her pound of pudding. The Federal Reserve legalized counterfeiting machines are printing money 24/7 and still cannot keep up with the demand. Why do you think for one moment Paulson wanted a totally free rein on what to do with this money without any oversight? That statement by him when this giveaway was first addressed should have stopped every hard working American citizen dead in our tracks. The message all 535 need pasted on their office doors when they return next week is, "Your days of elitism are over my fellow citizen, you have been reclassified by your fellow Americans as 100% guaranteed replaceable. It is in your best interest to place the needs of your country before those of your own, for you will get but ONE chance".

barb

November 12, 2008 10:34 AM

OMG, you are all so stupid, blaming everyone at AIG, get a grip there's over 100,000 employees that had nothing to do with this. The retreats were not for employee's but for brokers etc. that make millions for AIG.
You are all a bunch of ignorant fools. It's not a bailout AIG is paying it all back plus millions in interst. You're a bunch of bumbling fools just repeating what you hear on the news- too bad you know nothing

The Equalizer

November 12, 2008 11:40 AM

Barb, you're the fool if you think the things they are talking about (although maybe factually inaccurate) don't actually happen. If they are wrong, why don't you enlighten them, oh knowledgeable one?

Lewis Rambo

November 12, 2008 1:23 PM

Let AIG FAIL...No more Tax Money for WS Criminals

mike

November 17, 2008 12:53 PM

yeah yeah. lets blame it on the people that know absolutely nothing at their job. now if you want to get some info here it is stop blaming people that are just like you. now if you had that much money given to you from the U.S. don't act like you wouldn't spend on stuff that you want. p.s. don't blame the same people that work as hard as you do; blame the people that work less than you do. theirs our problem people.

john

December 15, 2008 11:45 PM

The first 20 Billion dollars of the AIG bailout went right to Goldman
If AIG went under so would have Goldman and all Palsons friends and retirement $$$$
(500 million??or so)
what a joke this whole thing is
Bush is so asleep at the switch he must be dead)

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