More On Legal & Compliancefrom The Advisor's Professional Library
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
- Best Practices for Working with Senior Investors Securities examiners deal harshly with RIAs that do not fulfill their fiduciary obligations toward senior investors, as the SEC and state securities regulators view older investors as particularly vulnerable and in need of protection.
On the same day that AIG reported a net loss of $24.47 billion, or $9.05/diluted share, for the third quarter of 2008, the Federal Reserve and Treasury Department said they have renegotiated financial support to AIG in a bid the government agencies said is meant "to keep the company strong and facilitate its ability to complete its restructuring process successfully."
Under the restructuring, AIG will now get $150 billion versus the original $123 billion in Fed money. AIG also now gets a five-year duration, $60 billion loan that would replace the original two-year $85 billion loan. The new loan would have an interest rate of 3% plus LIBOR, versus the old rate of 8.5% plus LIBOR. "Banks were receiving TARP money, which had a lower cost than AIG's loans. It was only fair that AIG get similar treatment," according to the law firm Sandler & O'Neill.
According to Sandler & O'Neill, AIG would also get $40 billion of Troubled Asset Relief Plan (TARP) money in preferred shares with a 10% interest rate. The government would keep its 79.9% ownership interest.
The government and AIG will create two separate entities that will buy the assets underlying AIG's troubled credit derivatives and securities lending operation. Sandler & O'Neill says entity #1 would get $30 billion from the government and $5 billion from AIG. It will buy $70 billion of collateralized debt obligations (CDOs). Entity #2 would get $22.5 billion from the government and $1 billion from AIG. "It would buy illiquid residential mortgage-backed securities (RMBS) from AIG for 50 cents on the dollar. This is supposed to replace the $37.8 billion lending facility from the government," according to Sandler & O'Neill.
What are the implications of the new deal? Sandler & O'Neill says that "AIG might actually survive with the new deal" because "it puts off the two-year deadline for selling AIG's properties. It lowers the debt cost to AIG. It provides long-term equity capital, which is what it really needed." The law firm also says the door is now "open for the insurers to get TARP money now that AIG has gotten it. Some life insurers, such as Hartford, Prudential, MetLife, Genworth, and others, want it. This could be good for the life insurers, given that it would replace the need for costly equity offerings."
As for its quarterly results, AIG's government appointed chairman and CEO, Edward Liddy, said they reflected "extreme dislocations and volatility in the capital markets and significant charges related to restructuring activities." However, Liddy said "retention of our customers remains strong," and that the poor results "are not indicative of the underlying core earnings power of our insurance businesses, which remain solidly capitalized."