Posted by: Theo Francis on November 10
The Treasury Dept. and the Federal Reserve say they are restructuring the more than $100 billion in assistance provided to shaky insurance giant American International Group Inc., easing lending terms, replacing some of the company’s existing government credit lines with a capital investment and establishing pools to buy assets from AIG.
All told, AIG will receive more than $150 billion in government aid, some of it replacing the loans it was already promised.
Under the agreement, the company will freeze its bonus pool and restrict severance pay for scores of executives, among other conditions. Shortly after the agreement was announced, AIG reported a $24.5 billion third-quarter loss, or $9.05 a share, the insurer’s fourth quarterly loss in a row.
Treasury said it would buy $40 billion of preferred shares from AIG, under provisions of the federal government’s Oct. 3 bailout bill; it also has an option on up to 2% of the company’s common shares. The Fed said the purchase let it reduce its original Sept. 16 credit line for AIG to $60 billion from $80 billion. AIG will pay a 10% dividend on the preferred shares, considerably higher than the 5% rate, rising to 9% after five years, that it has demanded from banks seeking federal funds.
The Fed said it was also loosening other terms of its loans to AIG, cutting the interest rate the company must pay to 3% over Libor from 8.5%; AIG must pay 0.75% on unused funds from the credit line, instead of 8.5%.
AIG investors had complained that the loan’s terms were too onerous and were hindering the company’s plans to restore its health by selling divisions and assets. A Treasury official said the agency made its move to protect the financial markets.
“In our view this wasn’t done for AIG shareholders, this was done to protect the taxpayer,” by giving AIG time to sell assets in an orderly fashion, the official said. “From our point of view, this is a restructuring of the government’s position in AIG that, by bringing more equity to the company, gives it a stronger financial structure.”
Treasury officials said the agency had briefed a member of President-Elect Barack Obama’s transition team on Sunday evening.
Also this morning, the Fed said it would provide $52.5 billion to set up two investment pools with AIG, replacing $37.8 billion in additional Fed loans made to AIG on Oct. 8.
One, for $22.5 billion, would purchase mortgage-backed securities from the New York insurance company, effectively buying problematic assets from the company and replacing them with cash on AIG’s balance-sheet. AIG will lend $1 billion to the fund, and bear the first $1 billion in losses, the Fed said. AIG’s proceeds from the arrangement will allow the company to return cash collateral posted under the company’s securities lending program.
The second fund, with $30 billion of federal money, would buy up collateralized debt obligations on which AIG has written credit-default swaps, the Fed said. AIG will lend this investment pool $5 billion and bear the first $5 billion in losses.
Treasury called the moves “part of a comprehensive plan to restructure federal assistance to the systemically important company,” and said the action was taken in conjunction with “steps taken by the Federal Reserve.”
Officials for the agency said today’s arrangement was separate from the $250 billion Capital Purchase Program established to provide funds to healthy banks. That means that the Treasury has allocated $290 billion of the initial $350 billion available to it under the Oct. 3 bailout bill; to use the second $350 billion under the measure, the administration must approach Congress. Treasury officials declined to say when they expected to do so.
The Treasury officials suggested similar one-off arrangements were possible, but made no commitments.
Treasury officials said that AIG would have to abide by the most stringent of the executive-pay restrictions imposed on banks accepting federal funds, and then some. For example, restrictions on golden-parachute payments will be applied to the company’s top 70 executives, rather than just to the top five executives.
The company has also agreed to freeze its bonus pool to an average of payouts in 2006 and 2007, the officials said. Those were good years for the company, but the officials said AIG’s bonus structure before 2006 wasn’t similar enough to average in earlier years. The bonus pool was frozen, not eliminated, because “the company needs to remain a viable institution and retain people that bring value to the institution,” one of the Treasury officials said.
In addition to the pay rules, AIG faces restrictions on lobbying and corporate expenses and must follow other rules imposed on it under the terms of its September loan, the Treasury officials said.
Washington Bureau Chief Jane Sasseen and other BusinessWeek writers cover the run-up to the Nov. 4 presidential election, paying close attention to how the candidates will handle issues such as housing, the economy, unemployment, and immigration.