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Fed Throws AIG Another Lifeline

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American International Group Inc. is getting another handout from the government.

Late on Sunday, March 1, U.S. officials announced that the government would provide another $30 billion in taxpayer money to AIG. This marks the fourth time that the government has intervened, and brings AIG’s total bailout funds to $180 billion.

AIG is not expected to use the $30 billion immediately.

Officials said they thought they had no choice but to support AIG because the company’s business and trading activities are tightly intertwined with the world’s banking system. The government added that more aid may still be needed.

AIG chairman Edward Liddy said in a conference call that eliminating the need for government support will be difficult because of the unstable economy and the company’s size.

Liddy added that the company is in the process of reorganizing its main businesses into separate companies “worthy of investor confidence.”

During the same conference call, AIG chief financial officer David Herzog said, “most of the funds coming into AIG [when the government received $85 billion in cash for 80 percent of the company] were turned over to other institutions, which benefited the entire financial sector.”

The decision to allot more money to AIG came after the company reported a $62 billion net loss for the fourth quarter of 2008, bringing its total 2008 losses to $100 billion.

The $62 billion loss is the largest single-quarter deficit ever reported by one company, although only $2 billion of the loss is in cash.

The company’s general insurance operations reported a $2.8 billion loss from insurance and current investment operations, but its life and retirement operations reported a $742 million profit on current life, retirement, and investment operations.

Overall revenue from premiums remained at $20 billion.

Prior to the announcement that the government would once again support AIG, credit-rating agencies such as Standard & Poor’s and Moody’s were planning to downgrade AIG’s credit rating because of the quarterly loss. However, after the agencies were briefed on the government deal, the companies have agreed not to downgrade AIG’s debt.

As part of the deal, AIG is allowed to exchange some of its nonvoting shares, which paid a 10 percent dividend, for new shares that do not require a dividend. This will save AIG $4 billion annually.

To help ease the company’s debt burden, some of its previous debt to the government will be converted into equity in AIG’s existing subsidiaries in Asia – American International Assurance and the American Life Insurance Company.

Despite the significant losses, Liddy said AIG is still viable.

“We have made meaningful progress in addressing liquidity issues related to [all of our financial products] and our securities lending activities, and have announced several divestitures … we are taking additional steps to preserve the value of our businesses and maximize the ultimate proceeds for the benefit of all stakeholder, including taxpayers.”

For more information on how to address your clients’ concerns in the wake of the AIG bailout, click here.


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