AIG's New Deal: Feds Ease Loan Terms, Provide Capital

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.

Reader Comments

David Chandler

November 10, 2008 09:14 AM

My company competes with AIG in the P&C market. We are much smaller than AIG. We played by the rules. We manage our balance sheet, we do not take undue risk for the sake of excessive profit and our executives do not get outlandish bonuses. In a free market the reward for this is suppose to be growth of your business while those who break the rules and take large risks ultimately to lose on those bets are suppose to pay a price.

What price will AIG really pay? They have to sell off some assets but no restrictions on future acquisitions? Executives will be eligible for bonuses based on 2006 and 2007 which were very good years? How about throwing in 2008 to the calculation? Once the loans are paid back will they be under any restrictions going forward? No. Are any executives paying back previous bonuses gained from these bets that ultimately went bad? No.

Bottom line. We, the taxpayers, get to finance nice bonuses for crooks, we give them better terms on the loans because of the systemic risk AIG represents to the markets making it easier for them to compete in a "free" market even though they screwed up, and those who play by the rules get screwed.

Navigator

November 10, 2008 09:16 AM

About time - if we own the place, then no more outsized bonuses, and no more Greek cruises. I don't care if they do loose top executives; they haven't been going a very good job anyway. Who cares if they leave?

Karl

November 10, 2008 09:23 AM

INSURANCE POEM (This poem was posted many months ago in the comments section of the BW Article entitled- SOCIAL MEDIA WILL CHANGE YOUR BUSINESS. Please pause after each *) There once were five bad people* I don't think that you know 'em* That's why I just sat down* To write INSURANCE POEM! They took a lot of money* From AIG it's true* It's just part of being an executive* It's what almost all will do! They probably all had Lawyers* Gave them a big retainer* Most likely believed they'd walk* That's certainly a big no-brainer! This country is CORRUPT* It's been that way for years* The corrupt ones keep de-frauding* And leave the honest ones in tears! But now we're speaking out* Writing letters to dad & mom* Some are posting poems* On ripoffreport.com* It's good to tell the truth* It shows that you aren't weak* Keep letting all of it out* With a comment on BusinessWeek! End. Please 'Google' this- FIVE FORMER INSURANCE EXECS FOUND GUILTY OF FRAUD, and read it! Also 'Google' this- SLUDGE POEM, and read it! Thank you.

williambanzai7

November 10, 2008 09:25 AM

THE AIG BALANCE SHEETS
(The Adams Family)
WilliamBanzai7

Their creepy and their kooky,
Mysterious and spooky,
Their all together flukey,
The AIG Balance Sheets.

Their office is a museum
Where people come to see 'em
They really are a scream
The AIG Balance Sheets.

(Black Hole)
(Opaque)
(Indeterminate)

So get your Bailout shawl on
and some drums that you can roll on
We're gonna pay a call on
The AIG Balance Sheets.

Karl

November 10, 2008 09:29 AM

If you enjoyed- "INSURANCE POEM", you might also enjoy- "4th QUARTER POEM", and the other poems, like- "FINANCIAL NUCLEAR OPTION POEM", that are in the comments section of another BW Article. Simply 'Google' this- FINANCIAL NUCLEAR OPTION POEM, and the power of 'Google' might just take you there!!!!! POWER TO THE PEOPLE!!!!!!!!!!!! Go Harvard!!!!! Go 'Google'!!!!! Go BusinessWeek!!!!!

Chuck Gaffney

November 10, 2008 11:16 AM

I bet they are ecstatic there at AIG. Now they got more play money for their lavish parties.

Jan

November 10, 2008 11:22 AM

REstrictions on the golden parachute? TAKE IT AWAY!!!!!!!!!!!!!!!!!!!!!
All the perks that have caused the failure of those companies, take away the perks.
It is like rewarding them because of failure!

Bob Snyder

November 10, 2008 11:51 AM

Please go post your "poems" on a blog somewhere, I don't think many people care to read them. But David Chandler is right and it's a shame. The free market rules don't apply to AIG cause they're too big? Well then break them up. If one part fails again later, then they can actually fail. I don't like the idea of the government owning a stake in AIG for the long-term (and i don't know what the plan actually is, either). One more thing, "too big to fail" companies should be restricted from forming in the future so that we never have to bail out any anybody else. It's one thing to put patches all over this problem and another thing to prevent it from happening again (the bailouts, not the failures).

sam

November 10, 2008 12:00 PM

It's not a bailout. It's theft.

Gumby

November 10, 2008 12:01 PM

Wall Street is spooked by GM and Ford shutdowns of SUVs and PickUp plants because it will hurt Wall Street's favorite stocks that is Big Oil like Exxon, Chevron and Conoco, etc.. Wall Street sold GM and Ford to get rid of them so that Toyota and Honda can keep building SUVs and PickUps to help Big Oil profits even bigger in the future ... The poor people will buy trashed old SUVs and PickUps and tow them to trailer parks to live in.... never mind drviing them because gasoline will cost $10 a gallon.. the wealthy can afford them..

Bob

November 10, 2008 01:49 PM

Trust me Gumby, I work for Toyota and they are struggling with SUV and Pickup sales just as bad as everyone else. But when you have such a sound business model and focus on decreasing the build cost of their smallest car instead of trying to build a bigger SUV that's sold for 40K, market downturns like this won't hurt you as much.

jake jackson

November 10, 2008 02:01 PM

WHERE will AIG take teir 500,000 dollar break this time

terrence

November 10, 2008 02:05 PM

The bailout never was anything but a money grab, and the pathetic leadership of the Democratic party rolled over on demand.

Jason Johnson

November 10, 2008 02:57 PM

Why would I (tax payers) want to own "Toxic Debt"? Chapter 11 is good enough for me, but not for rich people? I would rather get my loans and insurance from my small local bank and insurance companies rather than from big ones anyhow. The fat cats need to choke on their own fur ball, don't try force feeding it to me.

Karl

November 10, 2008 03:06 PM

Bob Snyder, I believe that BusinessWeek liked "FED POEM", because if you go to BusinessWeek's 'Home Page' and click on 'In Your Face', and then go to 'Page 9', and then click on the 2nd FACE, I'll appear on your computer screen!!! Hey Bob, I'm- IN YOUR FACE, aren't I? Have a nice day, Bob.

joe

November 10, 2008 03:12 PM

Print, baby, print! Just print money until no one in the world wants US dollars. This day is coming sooner than anyone believe.

Grant Bynum

November 10, 2008 03:12 PM

Agree with David. They need to get rewarded or punished by how they serve. Someone will pay for this eventually...bailing out sends the wrong message.

Ronni Martin

November 10, 2008 03:18 PM

Interesting. Are they (AIG) going to pay back the close to $500,000 that they used for a party when they got the money from the first bailout? This country is a joke, and the way that we bail out the people who mess over thousands of lives is beyond ridiculous. In Malaysia, when business people misappropriate funds, which AIG will never admit to doing, they pay for that crime with their lives, and they don't leave them on death row forever. Something to think about.......!

fred

November 10, 2008 03:29 PM

In the end, AIG will go broke and take all those taxpayer dollars to who knows where. They know when they have a sucker on the line.

Casino

November 10, 2008 03:47 PM

Article Summary:

Treasury will give cash to AIG that they will never repay so that executives can cash out before AIG actually goes under.

AIG gives worthless MBS and Swaps Contracts to United States.

Who will bailout the United States?

PacificGatePost

November 10, 2008 03:52 PM

How about applying a plan like this one directed to Detroit....

ONLY VERY DRASTIC ACTION WILL SAVE DETROIT

CONGRESS: Here’s a radical plan…

http://pacificgatepost.blogspot.com/2008/11/solution-for-detroit-gm-friends.html

It’s this, or bankruptcy. The American Auto industry should be saved but under new conditions

Taxpayers will pay heavily!

November 10, 2008 04:48 PM

Tax payers will end up owning hundreds of trillions dollars of CDS/CDO debts. God bless American tax payers!

Dennis in Detroit

November 10, 2008 04:57 PM

I'd sure like to make my 2006 or 2007 bonus!! Why should these guys get paid when the rest of us have to take pay cuts and/or no bonus checks because their companies made terrible decisions? People aren't buying cars or anything else because of their greed. And they'll be paid bonus checks using the taxpayers money....since they obviously don't have any money of their own.

Yet they won't give a loan to the car companies that can't sell cars because so many people are out of work or can't get credit......automaker executives are claiming that there will be no bonus payouts and a lot of salary cuts. Why isn't Wall Street held to the same standards? Cut their salaries and refuse all bonus payments until they've turned their companies around.....it's what the rest of us are doing!!!

Dave

November 10, 2008 05:02 PM

Ahh people, people..stop whining and crying. Man up, become smarter and become criminals!?! That's not only the way to acheive the american dream, that has now become the american dream! Good guys like David who posted, will never win by balancing the books properly, and minimizing and mitigating risks.

The rich get richer, and there is not an end to the foolishness by having the government have stake in the company. It just means that the next go round, it will be more of a "must save" company because Uncle Sam runs it!

Praveen

November 10, 2008 05:29 PM

Paulson has ruined the US economic model..........He did not rescue Lehman Brothers and his excuse was?????.............If Capitalism is not working then why embrace socialist policies in the garb of helping the economy??

philip max

November 10, 2008 06:08 PM

Pathetic.
In a single day our national debt went from 5 Trillion Dollars to 10 Trillion Dollars.

I still remember the Bush I debates where Bush accused Clinton of being a "card carrying Liberal" an unveiled attempt to connect the liberals with the general mindset that socialism and communism were somehow a criminal affiliation in the minds of the public.

What do we call this outright looting of the national treasury?

Not a peep from Justice Department!! Not even a nod to decency by insisting that the scoundrels running these illegal schemes be replaced WITHOUT compensation pending their convictions.

Why not , at a minimum, insist that the CEO and the entire board of directors immediately resign upon acceptance of any Gov't AID??

Greg

November 10, 2008 06:45 PM

Henry Paulson and Ben Bernanke ought to be in jail with AIG execs. And AIG still insists on sponsoring a UK soccer team. Shouldn't their new jersey logo read "USA" instead of "AIG"?

Gregory C

November 10, 2008 11:21 PM

Adam Smith is spinning in his grave. The Free Market can work--we must allow any and all institutions of all sizes, including the arbitrarily defined "too big to fail," to fail if they take unmanageable risks. Conversely, companies that manage risk and play by the rules, like Mr. Chandler's (above), should be allowed (and encouraged) to prosper and grow. The Fed should not bail out, under any circumstances, any company, no way, no how, not ever. And don't think for a minute $700B is the final price tag for this bailout...it's just the beginning.

Matt H

November 12, 2008 12:17 PM

Oh yeah... by the way, some execs from AIG were recently seen at a resort in Arizona. Thanks guys for spending our tax dollars... at least they stayed in the states.

http://www.abc15.com/content/news/investigators/story.aspx?content_id=d84dfd07-dd97-49f7-af14-3714d80b9107

Star

February 26, 2009 10:30 PM

My auto insurance is with AIG. The only thing that keeps me there is insurance companies usually charge 25% down and then the balance is divided up. I want out, but cannot afford to be uninsured in NV for even half a day and I do not have a job or the money to put up another 25% of the premium to start over again. I no longer want to be connected with AIG. Is there anything I can do or anywhere I can go?

Thank you for your interest. This blog is no longer active.

 

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