AIG Bailout Surges to $150 Billion

123jump.com Staff
10 Nov, 2008
New York City

The Federal Reserve invested $40 billion in preferred stock in AIG and lowered original loan of $85 billion to $60 billion and set up separate facilities to purchase mortgage and other securities. The revised and relaxed plan will increase Fed involvement with AIG to $150 billion and increase risk.

[R]10:00AM New York – AIG receives relaxed loan terms and capital injection from the Fed.[/R]

The Federal Reserve relaxed the terms of original loans to AIG and proposed less stringent loan terms and agreed to purchase preferred stocks in the troubled insurer. The Fed will take more risk and acquire $40 billion of preferred stocks and lower the original $85 billion in loans to $60 billion.

The loan terms will also have lower interest rate. The revised plan will charge AIG 300 basis points above the 3-month Libor rate and the fee on unused loans will be cut 75 basis points from 850 basis points. Loans will be extended to five years from two years and will be secured by liens against all assets of AIG and its subsidiaries.

The Fed has set up two separate loans totaling $52.5 billion for AIG that will provide funding in exchange of collateralized loans and securities. The first loan of $22.5 billion will purchase residential mortgage securities. This new loan vehicle set up in a subsidiary will replace the current $37.8 billion of loans from the New York Fed. AIG will invest $1 billion in subsidiary that the Fed will lend up to $22.5 billion and AIG will bear the full risk to that capital loss.

In the second new loan facility the Fed will provide up to $30 billion loans to a subsidiary that will purchase multi-collateralized debt obligation on which AIG has written credit default swaps. AIG will invest $5 billion in this subsidiary and will bear the risk of that amount.

Separately, AIG ((AIG)) reported third quarter loss of $24.47 billion or $9.05 a share compared to $3.09 profit or $1.19 a share in the prior year period. In the period the company recorded after tax net realized losses of $15 billion compared to a loss of $600 million. The securities and lending program resulted in a loss of $11.7 billion and $6.9 billion was linked to the AIG decision to hold them till maturity.

Losses linked to partnerships and mutual funds investment were $1.7 billion pre-tax compared to $454 million of net income in the year ago period.