WASHINGTON/NEW YORK (Reuters) - The government restructured its bailout of American International Group Inc, raising the package to a record $150 billion with easier terms, after a smaller rescue plan failed to stabilize the ailing insurance giant.
The 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 of investments.
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 September 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).
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, Ford Motor Co 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