AIG gets cash infusion from Treasury

Domestic economic turbulence continued Monday as the Treasury Department handed American International Group another huge chunk of cash, Circuit City stores filed for bankruptcy and mortgage company Fannie Mae’s third quarter profits plummeted.

But global markets rose upon news of China’s $586 billion plan to stimulate its economy — one of the world’s leading economic engines.

Treasury provided American International Group (AIG) with a $40 billion cash infusion in exchange for preferred stock as part of a restructuring of the giant insurer’s September rescue package.

All told, the federal government has now given the company more than $150 billion. But Federal Reserve officials said they were confident the money would be repaid to taxpayers.

AIG executives, who were criticized in a hearing on Capitol Hill for enjoying lavish events even as they took money from the government, will be subject to stringent limits on pay under the agreement with Treasury, including no increase in bonuses or golden parachutes. They also must comply with restrictions on lobbying and corporate expenses.

The company will use the Treasury’s $40 billion to pay back some of the loans it received from the Federal Reserve in mid-September to stave off bankruptcy. The Fed also is restructuring its more than $100 billion in loans to AIG, lowering the high interest rate of 14 percent and penalty fees it originally extracted to reflect the more lenient terms the Treasury and Fed recently has been offering banks and other companies.

AIG was struggling under the previous harsh agreement with the Fed, and had been unable to sell off company assets to repay the loans.

Under the new deal, the Fed is purchasing $52.5 billion of troubled mortgage assets and dissolving the insurance contracts the company wrote on them, enabling the company to shed a key source of its financial troubles. AIG was driven to the brink of bankruptcy in September as it was forced to raise collateral to back the insurance it provided on its huge portfolios of troubled loans.

New York-based AIG said it lost $24.47 billion, or $9.05 per share, after a profit of $3.09 billion, or $1.19 per share, a year ago. Revenue declined 97 percent to $898 million from $29.84 billion in the third quarter 2007.

Circuit City Stores Inc., the nation’s second-biggest electronics retailer, filed for bankruptcy protection on Monday but plans to stay open for business as the busy holiday season approaches.

It said it decided to file for bankruptcy protection because it was facing pressure from vendors who threatened to withhold products during the holiday shopping period. The company also said it cut 700 more jobs at its headquarters, after announcing a week ago that it would close 20 percent of its stores and lay off thousands of workers.

Circuit City filed under Chapter 11 of the bankruptcy code, which will allow it to hold off creditors and continue operations while it develops a reorganization plan. Its Canadian operations also filed for similar protection.

Government-controlled mortgage finance company Fannie Mae said it lost $29 billion in the third quarter as it took a massive tax-related charge and saw mortgage defaults continue to rise.

The company, seized by federal regulators more than two months ago, posted a loss of $13 per share for the July-September quarter, mainly due to a $21.4 billion non-cash charge to reduce the value of a tax asset. That compares to a loss of $1.4 billion, or $1.56 a share, in the year-ago period.

Trading on Wall Street opened strong, with the Dow Jones index up 150 points early. But by 12:30 the Dow was down 51.93 points, or 0.58 percent. to 8,891.88. The Nasdaq dropped 20.80 points, or 1.26 percent, to 1,626.60, while the S&P 500 declined 8.89 points, or 0.95 percent to 922.10.

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