The U.S. government is boosting its investment in embattled insurer American International Group Inc., providing the firm with an additional $30 billion in capital but also exposing U.S. taxpayers to additional risk.
The Treasury Department and Federal Reserve announced the third version of the government's bailout of the firm in a joint statement made in conjunction with the firm's announcement of a fourth-quarter loss of $61.7 billion. In addition to providing up to $30 billion in additional capital to AIG in return for preferred stock, the Treasury Department said it would convert its existing $40 billion of preferred shares into new preferred shares that more closely resemble common stock.
Those steps will be coupled with changes to the Fed's existing $60 billion resolving credit facility for AIG. The Fed and the Federal Reserve Bank of New York plan to take up to a $26 billion preferred interest in two AIG life insurance subsidiaries—American Life Insurance Co. and American International Assurance Co.—as well as make $8.5 billion in new loans to benefit the domestic life insurance subsidiaries of AIG. In addition, the interest rate on the existing credit facility will be modified to reduce the existing floor.
AIG on Wednesday will issue new convertible preferred shares worth a 77.9% stake in the company as part of the overhaul of their government rescue. The company will also now have to comply with much more stringent executive compensation rules put in place by Congress as part of the recently passed economic stimulus legislation.
The Fed and Treasury said the steps are meant to provide "tangible evidence" of the government's commitment to an orderly restructuring of AIG, and that the cost of not helping the company was judged to be too high.
"Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high," the Treasury and Fed said in a joint statement.
They noted that AIG, through the various financial contracts it has backed, is a "significant counterparty to a number of major financial institutions." That fact has all but required the government to backstop the firm, as a collapse of AIG would ripple through the market and affect the other major financial firms the government has poured hundreds of billions of dollar into in recent months.
"The company continues to face significant challenges, driven by the rapid deterioration in certain financial markets in the last two months of the year and continued turbulence in the markets generally," the Treasury and Fed said.
Rating agencies reacted to the government's announcement by confirming a number of AIG's current ratings, an important step that will prevent the company from incurring additional losses because of a downgrade. Fitch Ratings confirmed its ratings on AIG's senior unsecured securities and certain insurer financial strength ratings, while Moody's Investors Service confirmed AIG's senior debt rating, giving the company a negative outlook but also confirming many of its insurer financial strength ratings.
The moves by the U.S. government are aimed at keeping AIG healthy enough so the firm can complete a restructuring and start to repay taxpayers for the assistance the firm has received. AIG's funding is already well above the $50 billion that Citigroup Inc. has received through three Treasury programs, as well as the $45 billion that Bank of America Corp. has taken. In both cases with the banks, however, the government has left the door open for providing additional funds and has provided guarantees on hundreds of bi llions of assets that could lead to huge losses down the road.
AIG Chairman and CEO Edward Liddy said in a release of the company's fourth-quarter results that the success of AIG's restructuring plan "centers on ensuring that the unique businesses that make up AIG can thrive on their own. He also cited the importance of "repaying our obligation to the U.S. government."
Meanwhile, AIG posted a net loss of $61.7 billion, or $22.95 a share, compared with a year-earlier net loss of $5.3 billion, or $2.08 a share. The latest results included the restructuring charges and writedowns.
The loss is the biggest quarterly loss in history, breaking the record set by Time Warner in 2002 amid its acquisition of America Online.
AIG's shares were recently up 9.5% at 46 cents in premarket trading. The stock is off 73% so far this year and 99% in the last 12 months.
The company said it will form a general-insurance holding company including its commercial insurance group, foreign general unit and other property/casualty operations, to be called AIU Holdings Inc. AIU will have its own board and management and its creation will help AIG prepare to possibly sell a minority stake in the business.
AIG also said it is considering combining its domestic life and retirement businesses as it looks to boost competitiveness. The combined units would have assets of $246.8 billion.
Liddy said the company has made "meaningful progress" in addressing its liquidity issues, but it is taking more steps to preserve the value of its business amid the economic and capital-market turmoil.
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