- The Washington Times - Monday, March 2, 2009

The Treasury and Federal Reserve on Monday morning revised their bailout agreement with American International Group yet again, this time providing the insurance giant access to another $30 billion in cash at more generous terms.

The changes for the government’s biggest bailout recipient follow revisions on Friday to Citigroup’s bailout, which was the second largest ever negotiated by the Bush administration. The additional cash infusions were deemed necessary as AIG incurred a gigantic $61.7 billion loss in the fourth quarter — the largest ever reported by any company. Unlike Citigroup, the government already acquired 80 percent ownership of AIG in September.

In announcing the complex deal, the Treasury said it has to keep the sprawling conglomerate alive, including divisions spread all over the globe in 130 countries, because it provides insurance to more than 30 million policyholders in the United States as well as companies employing more than 100 million Americans. The government said AIG’s failure could be devastating to already wracked financial markets.

“The long-term solution for the company, its customers, the U.S. taxpayer and the financial system is the orderly restructuring and refocusing of the firm” on its profitable basic insurance businesses, the Treasury and Fed said in a statement. “This will take time and possibly further government support, if markets do not stabilize and improve.”

AIG has been unable to sell some of its divisions to pay off its government loans, as originally planned, in part because potential buyers have been unable to get the loans they need to consummate any purchases.

Under the multifaceted deal, AIG will receive a $30 billion credit line from the Treasury on top of loans it is receiving from the Fed to tap as the company winds down the risky and unprofitable credit insurance business known as “credit default swaps” that led to its failure in September. The government is lowering the rate of interest AIG must pay on the loans.

In exchange, the Treasury and Fed will receive preferred shares, which do not require the high dividend payments and other stringent terms the government secured in previous bailout deals. The onerous terms of AIG’s original bailout were forcing even greater losses on the company as it struggled to survive.

“American International Group has set a doleful record” with its gigantic losses, said Lauren Silvia Laughlin, analyst with Breakingviews.com, a British financial think tank. “The swelling of its woes also makes U.S. taxpayers even bigger losers.”

Ms. Laughlin noted that AIG is being required to separate its bad businesses from its good businesses so the bad ones can be sold off quickly at deep discounts — a move that is necessary to cleanse the firm of its biggest liabilities.

“Regulators can’t see any realistic alternative to having taxpayers throw good money after bad,” she said. “The authorities may not be completely sure that an AIG failure would cause market mayhem. But after the chaos ignited by the Lehman Brothers’ bankruptcy, they cannot take the chance.”


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