The federal government agreed Sunday night to provide an additional $30 billion in taxpayer money to the American International Group and loosen the terms of its huge loan to the insurer, which is preparing to report a $62 billion loss on Monday, the biggest quarterly loss in history, people involved in the discussions said.
The intervention would be the fourth time that the United States has had to step in to help A.I.G., the giant insurer, avert bankruptcy. The government already owns nearly 80 percent of the insurer’s holding company as a result of the earlier interventions, which included a $60 billion loan, a $40 billion purchase of preferred shares and $50 billion to soak up the company’s toxic assets.
But hey, why should we complain? It’s a new deal!
The new deal, the government’s fourth for AIG, represents a nearly complete reversal from the one first laid out in mid-September. Back then, federal officials acted as a demanding lender, forcing the insurer to pay a steep interest rate for what was expected to be a short-term loan. Now the government is relaxing loan terms by wiping out interest in hopes of preserving AIG’s value over a longer period.
The plan raises the possibility that the 90-year-old firm will be broken up completely, with businesses being hived off in separate stock offerings, although that process would likely take years. The company is planning to combine its giant property-casualty insurance operations into a new unit, with a new name and separate management, and to sell nearly 20% of it to investors.
AIG’s revised deal effectively cuts the interest and dividend payments that the insurer must make to the government. That eases the financial burden on the company, which is expected to report a $60 billion quarterly loss on Monday.
Under the latest plan, the U.S. will give AIG access to up to $30 billion in new cash from its Troubled Asset Relief Program, or TARP, but will also cut the insurer’s $60 billion credit line with the Federal Reserve to between $20 billion and $25 billion. The 10% annual dividend on the company’s $40 billion preferred shares could be reduced to zero, a key comfort to ratings agencies.
With the latest move, AIG will have the benefit of up to $70 billion from the TARP program; it got a $40 billion TARP investment in November. The total amounts to 10% of the $700 billion financial-sector rescue fund, money that most lawmakers did not expect would go toward propping up a troubled insurer. Officials believed they had little choice but to use the TARP money, particularly because they lack the authority to unwind a troubled firm such as AIG the way the government can do now with failing banks.
Too much is never enough? Not for AIG!
And the government isn’t necessarily finished providing support. Government officials are expected to continue assisting AIG as needed in order to help the company shrink and dispose of some of its businesses, according to people familiar with the matter.
Reading about the bailouts, the spendulus and the omnibus bill is like watching reruns of Shaun of the Dead, only that the zombies are the ones getting rewarded.
And us the living are the ones paying for it all.
How Washington can prevent ‘zombie banks’. Prevent? Isn’t that a little late?
Make no mistake: the markets are responding to these spendthrift policies. Right now the Dow opened 132 down, and is now at 6,930, below 7,000 for the first time since October 1997.