AIG to Get Additional $37.8 Billion

 

Barry Meier and Mary Williams Walsh

 

New York Times

 

October 9, 2008

 

The Federal Reserve Board said Wednesday that it would provide up to $37.8 billion to the embattled insurer the American International Group to help it deal with a rapidly dwindling supply of cash.

 

The additional assistance is on top of $85 billion in a bridge loan that the Federal Reserve extended to A.I.G. in September, but it will take a different form. A spokesman for A.I.G., Nicholas Ashooh, said the new assistance was intended to keep the company from having to draw down the Fed loan so quickly.

 

The Fed threw A.I.G. the $85 billion lifeline shortly after the collapse of Lehman Brothers, when the financial markets were reeling and there were doubts the system could weather the demise of another big financial services company. At the time, the Fed’s loan was the most radical intervention ever by the central bank in a company’s affairs.

 

Even as A.I.G. now works through a major overhaul, the rest of the insurance industry is still struggling with the continuing turmoil in the financial markets. Shares of MetLife, the nation’s largest life insurer, fell 27 percent on Wednesday to close at $27 a share after the company said its third-quarter earnings would be down significantly from a year ago and that it had to raise new capital.

 

Its earnings were hurt by lower investment returns, lower fees on variable annuities, and losses on its investments in troubled companies like Lehman Brothers, A.I.G. and Washington Mutual.

 

MetLife offered 75 million shares at $26.50 a share on Wednesday.

 

The Allstate Corporation’s stock fell 21 percent on Wednesday amid investor concern that it, too, would have to raise new capital. The Hartford Financial Services Group said this week that it would raise $2.5 billion.

 

The bailout of A.I.G. has not gone smoothly. Shares were greatly diluted by the Fed’s original move, and investors have been asking why they were not allowed to vote on the terms of the bailout.

 

Then the company surprised analysts last week by disclosing that it had already drawn down $61 billion of the Fed loan. The speed of the drawdown led credit analysts to downgrade some of its debt and put other types of its debt on negative credit watch, signaling that other downgrades were possible.

 

This week, former A.I.G. executives were questioned by members of Congress, who wanted to know whether Goldman Sachs and other business partners had benefited from the bailout. Goldman Sachs has said that it had no meaningful exposure to losses from A.I.G.

 

A.I.G. said Wednesday that it would use the $37.8 billion from the Fed to improve the liquidity of its securities lending business, which is losing cash rapidly. By stopping that flow, A.I.G. said, it would be able to preserve more of the Fed loan and use that money more effectively to wind down the affairs of A.I.G.’s troubled structured finance division, known as the financial products unit.

 

Under the latest agreement, the Federal Reserve Bank of New York will accept up to $37.8 billion of fixed-income securities from A.I.G.’s regulated life insurance subsidiaries and will give the subsidiaries cash collateral in return. That will help the insurance subsidiaries to settle existing transactions in their securities lending business.

 

In that business, the insurers lent securities to investors, like hedge funds, and received both the value of the securities and a fee in return. The insurers then invested those funds in other instruments, such as mortgage-backed securities.

 

But now that the value of mortgage-backed securities has plummeted, A.I.G.’s insurance subsidiaries do not have the money to repay their securities-lending partners when they bring back the securities they borrowed and want their money back.

 

By stepping in and permitting A.I.G. to lend the securities onward to the New York Fed, the Fed will allow A.I.G. to preserve cash. It will also keep A.I.G. from having to mark down the value of the securities at a time when their market value is constantly changing.

 

The central bank said that the new program would help A.I.G. use cash more effectively and provide enhanced credit protection to the taxpayers, who stand behind the $85 billion loan.

 

 

 

AIG Congressional Hearing: “They Were Getting Manicures…While American People Were Footing the Bill

 

Huffington Post  

 

http://www.huffingtonpost.com/2008/10/07/aig-congressional-hearing_n_132614.html

 

Dave Burdick  

 

October 7, 2008 

 

THE AIG LUXURY RETREAT

 

At one point, Rep. Elijah Cummings brought up a costly AIG executive retreat that occurred briefly after the government bailout. The costs, he said, totaled $443,343.71.

 

From Speaker.gov, here's Rep. Elijah Cummings (D-MD) on the AIG manicure, etc., expenditures:

 

Have you heard of anything more outrageous - a week after taxpayers commit $85 billion dollars to rescue AIG, the company's leading insurance executives spend hundreds of thousands of dollars at one of the most exclusive reports in the nation...Let me describe for some of you the charges that the shareholders, taxpayers, had to pay. AIG spent $200,000 dollars for hotel rooms. Almost $150,000 for catered banquets. AIG spent $23,000 at the hotel spa and another $1,400 at the salon. They were getting manicures, facials, pedicures and massages while American people were footing the bill. And they spent another $10,000 dollars for I don't know what this is, leisure dining. Bars?

 

WHY WAS AIG BAILED OUT IN THE FIRST PLACE?

 

Just after it happened, the New York Times had explained why an AIG bailout seemed so important:

 

What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy, but A.I.G.'s role as an enormous provider of esoteric financial insurance contracts to investors who bought complex debt securities. They effectively required A.I.G. to cover losses suffered by the buyers in the event the securities defaulted. It meant A.I.G. was potentially on the hook for billions of dollars' worth of risky securities that were once considered safe.


If A.I.G. had collapsed -- and been unable to pay all of its insurance claims -- institutional investors around the world would have been instantly forced to reappraise the value of those securities, and that in turn would have reduced their own capital and the value of their own debt. Small investors, including anyone who owned money market funds with A.I.G. securities, could have been hurt, too. And some insurance policy holders were worried, even though they have some protections.