AIG gets US$150b bailout; posts huge loss

 

WASHINGTON/NEW YORK: The US government restructured its bailout of American International Group Inc, raising the package to a record US$150 billion with easier terms.

This came after a smaller rescue plan failed to stabilise the ailing insurance giant.

The US Federal Reserve and the Treasury Department announced the new plan yesterday as AIG reported a record US$24.47 billion third-quarter loss, largely from writedowns of investments.

AIG, once the world’s largest insurer by market value, nearly collapsed after being forced to post large amounts of collateral related to exposure to complex derivatives known as credit default swaps. Many of these securities were linked to the performance of residential mortgages, and lost value as the US housing downturn mushroomed into a global credit crisis.

“We cannot continue to hemorrhage cash in the two areas of securities lending and credit default swaps,” chief executive Edward Liddy said on a conference call. “We need to stop that and we need to stop it now.”

Under the new rescue plan, the government will get a US$40 billion equity stake in AIG, spend as much as US$30 billion on securities underlying the insurer’s credit default swaps, and spend up to US$22.5 billion to buy residential mortgage securities.

It will also reduce a previously announced credit line to US$60 billion from US$85 billion, and lower interest rates on borrowings. AIG will also accept curbs on executive pay, including a freeze of bonuses for its top 70 executives.

“The restructured bailout should give AIG the flexibility to sell assets in an orderly manner for closer to their intrinsic values rather than fire-sale prices,” CreditSights Inc analyst Rob Haines wrote. “Moreover, we believe that it will help to restore confidence in AIG’s global franchise.” - Reuters