AIG Gets a New Deal; Posts $24 B Quarterly Loss

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.”