The federal government today relaxed the terms of the American International Group Inc. rescue package as the company posted a $24 billion loss on $898 million in revenue.
Total domestic life sales and deposits increased during the third quarter at AIG, New York, despite the effects of the financial crisis.
But AIG notes in a quarterly report filed with the U.S. Securities and Exchange Commission that further downgrades could result in about $12 billion in collateral calls and termination payments, along with early terminations of some multi-sector super senior credit default swap arrangements, or CDS arrangements, with a net notional value of about $48 billion.
THE RESCUE PACKAGE
The U.S. Treasury Department says it will try to help AIG recover from lingering problems with its shuttered financial products unit and related problems by changing the company’s rescue package.
In exchange for accepting strict limits on compensation for the top 5 senior executive officers at AIG, limits on golden parachutes, and a freeze on the size of the annual bonus pool for the top 70 company executives, AIG has received a sharp reduction in the cost of the government financing.
The new, $150 billion package will replace a 2-year, $85 billion Federal Reserve Bank of New York credit facility with a 5-year, $60 billion term.
The interest rate will drop to 3 percentage points plus the 3-month U.S. London Interbank Offered Rate, from 8.5 percentage points plus LIBOR.
The fee for undrawn credit facility capacity will drop to 0.75% of the total amount, from 8.5%.
AIG also will sell get $40 billion by selling the government’s Troubled Asset Relief Program preferred shares paying a 10% interest rate.
The government plans to contribute a total of about $52 billion and AIG about $6 billion to 2 entities that would buy and manage assets from AIG’s credit derivatives and securities lending operations.
AIG Chairman Edward Liddy said today during the company’s third-quarter earnings teleconference that AIG now owes the government $61 billion on the credit facility and about $20 billion for money borrowed through a separate secured lending facility.
AIG has been using most of the financing to handle the financial products unit’s obligations.
In the past, when AIG had AAA ratings, the unit used AIG’s financial strength to sell CDS arrangements. The CDS arrangements guaranteed that other large borrowers would keep up payments on their notes and bonds.
When the mortgage-backed securities market began to collapse and the ratings of debt issuers that once seemed secure deteriorated, AIG’s own debt ratings began to fall.
Parties that bought AIG CDS arrangements demanded that AIG back the arrangements with tens of billions of dollars in additional collateral.
One of the new Fed-AIG entities will focus on buying the multi-sector collateralized debt obligations, or CDOs, underlying credit defaults swaps that AIG has written.
Analysts have concluded that AIG and government officials that AIG will be paying about 50 cents on the dollar for the CDOs, then “terminating” the CDS arrangements linked to those CDOs.
The Fed-AIG entity will try to renegotiate the terms of the CDOs underlying the AIG-written CDS arrangements, according to Liddy.
“The Federal Reserve, and its rather substantial influence will be the driver of the negotiations with the counterparties, and we would expect that they will have substantially more success with those discussion than we had,” Liddy said during the earnings conference.
Liddy said the Dutch government has been providing support for ING Groep N.V., Amsterdam, and AEGON N.V., The Hague, Netherlands, to help them cope with the same systemic issues that AIG has been facing.
The new government aid package restructuring “may be a way to stave off or limit the impact of downgrades,” securities analysts at Sandler O’Neill & Partners L.P., New York, write in a comment on the restructuring.
Because of the restructuring, “it looks like AIG might actually survive,” the Sandler O’Neill analysts write. “It puts off the 2-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.”
Another implication is that other insurers may end up in TARP, the analysts write.
Some publicly traded life insurers seem to like the idea of getting into TARP and hastening the arrival of federal regulation of insurers, but other insurers seem to be leery of TARP and the prospect of federal regulation, the analysts write.
AIG is a bailout fund.
It’s a slightly more sophisticated Tarp. Which is why nobody should really be surprised by this morning’s news.
The US government is to extend its existing credit line to AIG to a staggering $150bn. Not, though, to save the ailing insurer.