* US boosts rescue to $150 billion, takes equity stake
* AIG posts $24.47 billion loss on investment losses
* AIG shares rise; debt protection costs decline
(Adds CEO interview, White House spokeswoman comments)
By Mark Felsenthal and Lilla Zuill
WASHINGTON/NEW YORK, Nov 10 The U.S. government
restructured its bailout of American International Group Inc
(AIG.N), raising the package to a record $150 billion with
easier terms, after a smaller rescue plan failed to stabilize
the ailing insurance giant.
The U.S. Federal Reserve and the Treasury Department
announced the new plan on Monday as AIG reported a record
third-quarter loss of $24.47 billion, largely from write-downs
The new package, at least $27 billion more than was
previously extended, will leave the government exposed to
billions of dollars of potential losses.
AIG, once the world's largest insurer by market value,
nearly collapsed after being forced to post large amounts of
collateral related to exposure to complex derivatives known as
credit default swaps.
Many of these securities were linked to the performance of
residential mortgages, and lost value as the U.S. housing
downturn mushroomed into a global credit crisis.
"We cannot continue to hemorrhage cash in the two areas of
securities lending and credit default swaps," Chief Executive
Edward Liddy said on a conference call. "We need to stop that,
and we need to stop it now."
Under the new plan, the government will get a $40 billion
equity stake in AIG, spend as much as $30 billion on securities
underlying the insurer's credit default swaps, and spend up to
$22.5 billion to buy residential mortgage securities.
It will also reduce a previously announced credit line to
$60 billion from $85 billion, and lower interest rates on
borrowings. AIG will also accept curbs on executive pay,
including a freeze of bonuses for its top 70 executives.
"The restructured bailout should give AIG the flexibility
to sell assets in an orderly manner for closer to their
intrinsic values rather than fire-sale prices," CreditSights
Inc analyst Rob Haines said. "Moreover, we believe that it will
help to restore confidence in AIG's global franchise."
Shares of AIG were up 26 cents, or 12.3 percent, at $2.37
in afternoon trading on the New York Stock Exchange. The cost
of protecting AIG debt against default declined, indicating
that investors see less risk.
AIG will issue preferred shares to the government that
carry a 10 percent dividend. The government will maintain its
roughly 80 percent stake in AIG, making it the biggest
beneficiary of the revised bailout.
In an interview, Liddy said it's possible the ownership
stake could fall as AIG gets its finances in order.
"Once all of this is repaid, and we don't need that
(credit) facility anymore, I think we will have some rather
robust discussions about that ownership percentage," he said.
He acknowledged the possibility, though, that even $150
billion might not be enough. "There is more breathing room, but
the answer is, 'What do you think is going to happen to capital
markets?'" he said. "Under any normal scenario, I think we are
in pretty good shape. But you can never say never."
The $40 billion equity infusion comes from the $700 billion
financial bailout package passed into law last month.
That package was originally intended for banks, and AIG is
the first company other than a bank to get money from it. It
was created after the government announced the original $85
billion bailout package for AIG on Sept. 16.
"Today's action was a one-off event," Neel Kashkari, the
Treasury Department's interim assistant secretary for financial
stability, said at a conference in New York. "It is not the
start of a new program."
White House spokeswoman Dana Perino said "AIG, being
clearly within that financial service sector, is what Congress
had in mind when it passed the rescue package."
She called AIG "a large, interconnected firm," and said the
new package "will allow AIG to continue to restructure
themselves in a way that will not hurt the overall economy."
A Treasury Department official said a member of
President-elect Barack Obama's transition team was briefed on
the transaction Sunday night.
The $60 billion credit line will mature in five years,
while the $85 billion line was set to mature in two years.
A longer maturity could reduce the potential that AIG would
have to quickly sell assets at depressed prices to help repay
the government. The Fed slashed the interest rate on the credit
line by 5.5 percentage points, to 3 percentage points above the
three-month Libor (London Interbank Offered Rate).
BIG QUARTERLY LOSS
The revised plan depends on the government being able to
convince holders of securities underlying AIG credit default
swaps to sell them to the government, likely at a discount.
"The biggest questions attached to these new vehicles are
who is going to take how big of a haircut, and when," said
Donald Light, an analyst at Celent LLC in San Francisco.
Struggling automakers General Motors Corp (GM.N), Ford
Motor Co (F.N) and Chrysler LLC have also requested tens of
billions of dollars in government help.
AIG posted a quarterly loss of $24.47 billion, or $9.05 per
share, compared with a profit of $3.09 billion, or $1.19 a
share, a year earlier.
Revenue fell to $898 million from $29.8 billion, reflecting
the write-downs. AIG also had $1.39 billion in catastrophe
losses, primarily from Hurricanes Gustav and Ike.
Credit default swaps led AIG to $18 billion in losses in
the nine months ended June 30.
The cost of protecting $10 million of AIG debt against
default for five years fell on Monday to $1.9 million up front
plus $500,000 annually, according to Markit Intraday. The
upfront payment was $4.9 million on Friday.
(Additional reporting by Pedro Nicolaci da Costa and Jonathan
Stempel in New York; and John Crawley and David Lawder in
Washington; Writing by Jonathan Stempel; Editing by Chizu
Nomiyama, John Wallace and Jeffrey Benkoe)