AIG Needs More

Oh oh.

new_york_times:http://www.nytimes.com/2008/11/10/business/economy/10aig.html

By ANDREW ROSS SORKIN and MARY WILLIAMS WALSH
Published: November 9, 2008
The Bush administration was overhauling its rescue of American International Group on Sunday night, according to people involved in the transaction, amid signs that its initial credit line of more than $100 billion and the interest that came with it were putting too much strain on the ailing insurance giant.
The Treasury Department and the Federal Reserve were near a deal to invest another $40 billion into the insurance giant, these people said. The new cash, which would be part of a huge restructuring of A.I.G.’s debt, comes after the government made an $85 billion emergency line of credit available in September to keep it from toppling and another $38 billion line when it became clear that the original amount was not enough.
The restructuring of the deal was just one sign of the intense debate in Washington over how and when the government should be bailing out private companies. The money would come from the $700 billion that Congress authorized the Treasury to use to shore up financial companies. Just this weekend, Democratic leaders in Congress called on the Bush administration to use some of that money to rescue Detroit automakers.
When the restructured deal is complete, taxpayers will have invested and lent a total of $150 billion to A.I.G., the most the government has ever directed to a single private enterprise. It is a stark reversal of the government’s pledge that its previous moves had stemmed the bleeding at A.I.G.
The deal is likely to cause even more consternation among some lawmakers in Congress who have raised questions about the government’s role in bailing out Wall Street firms and are now under pressure to help the ailing automotive industry.
The government’s original emergency line of credit, while saving A.I.G. from bankruptcy for a time, now appears to have accelerated the company’s problems. The government’s original short-term loan came with an expensive interest rate — about 14 percent — which forced the company into a fire-sale of its assets and reduced its ability to pay back the loan, putting the company’s future in jeopardy.
The new deal would make the government a long-term investor in the future of A.I.G., something that Treasury Secretary Henry M. Paulson Jr. had previously said he hoped to avoid. As part of the restructuring, the government would lower the loan amount to $60 billion from $85 billion, but lengthen the duration of the payment schedule to five years from two years and also lower the interest rate.
At the same time, the government, using part of the $700 billion fund, would buy $40 billion in preferred shares in A.I.G. In return, A.I.G. would pay a 10 percent interest rate on those shares, similar to the interest rate that banks agreed to pay last month when they received cash injections.
The government is also planning to spend an additional $30 billion to help A.I.G. buy “collateralized debt obligations” that it had agreed to insure and put them into a new entity, effectively removing them from A.I.G.’s balance sheet. A.I.G. would contribute $5 billion to the new entity, which would buy $70 billion of C.D.O.’s at 50 cents on the dollar. Finally, the government would invest another $20 billion to help A.I.G. buy residential mortgage-backed securities and similarly place them into another entity.
The goal of both programs is to create separate entities to buy and hold A.I.G.’s most toxic assets and is aimed at shoring up the company’s balance sheet so it can continue operating and keep it from rushing to sell assets at depressed prices.
A spokeswoman for the Fed declined to comment. A spokeswoman for the Treasury did not return a call for comment. A spokesman for A.I.G. declined to comment.
A.I.G. negotiated the original $85 billion revolving credit facility from the Federal Reserve after its efforts to raise money from private lenders failed in the panic of mid-September. The amount needed ballooned in just a few days, as counterparties to A.I.G.’s big book of credit-default swaps laid claim to whatever collateral they were entitled to.
People briefed on the negotiations said the $85 billion was thought at the time to be the maximum amount that A.I.G. would need, including a little extra for a cushion. The interest rate was set at the three-month Libor plus 8.5 percent, which currently works out to around 14 percent. (Libor is a commonly used index that tracks the rates banks charge when they lend to each other.) In exchange for making the loan, the Fed was promised a 79.9 percent stake in A.I.G.
Edward Liddy, the insurance executive brought in to lead the company out of the crisis, initially said he believed the Fed money would be like water pouring into a bathtub — a lot might be needed at first, but eventually the tub would be filled and the faucet could be turned off.
Since then, A.I.G. turned out to need more than expected.
In addition to the $85 billion Fed loan and the $38 billion special lending facility, A.I.G. recently said it had been granted access to the Fed’s commercial-paper program, which is available to all companies that issued commercial paper before the credit markets seized up. A.I.G. can borrow up to $20.9 billion under the program.
Even as the government works to solidify A.I.G.’s finances, elected officials have been demanding a fuller accounting of the company’s business practices and executive pay structure. In October, the New York attorney general, Andrew M. Cuomo, reached an agreement forcing A.I.G. to freeze payments to former executives. The move followed the revelation, in a hearing convened by Representative Henry Waxman, Democrat of California, that the former head of A.I.G.’s troubled Financial Products unit had been kept on as a well-paid consultant after he left the company earlier this year.
Mr. Waxman, as well as Senator Charles E. Grassley, Republican of Iowa, have demanded that A.I.G. provide a more detailed accounting of its credit derivatives business.