Another Handout for AIG
Citing the "systemic risk" that would follow the collapse of insurer American International Group (AIG), the government on Mar. 2 announced another bailout for the company, restructuring the terms of existing loans and extending another $30 billion in credit. Meanwhile, AIG reported a huge loss of $61.7 billion in the fourth quarter—the largest in American corporate history. Most of the losses result from restructuring charges and writedowns on the value of assets.
The new rescue effort—which gives the government equity in two of AIG's life insurance holding company subsidiaries—comes as efforts by AIG to shed assets to pay off a $60 billion loan from the Federal Reserve have faltered and rating agencies threatened to downgrade the company's credit. And it's not clear the Mar. 2 intervention by the government will be the last. That "depends on what happens to the capital markets in the near term," AIG CEO Edward Liddy said in an interview on the cable channel CNBC.
The Treasury Dept. and the Federal Reserve, in a joint news release, said the move was important to stabilize AIG to protect the financial system, and taxpayers should not let AIG default on its debt. "Given the systemic risk AIG continues to pose and the fragility of the markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high."
The news release continued: "The steps announced today provide tangible evidence of the U.S. government's commitment to the orderly restructuring of AIG over time in the face of continuing market dislocations and economic deterioration."
Negative Outlook Continues
After the government action, Standard & Poor's (MHP) reaffirmed counterparty ratings on AIG and counterparty and financial strength ratings on AIG's insurance subsidiaries and removed it from CreditWatch with negative implications. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies.) The outlook on the companies remained negative. The other major rating agencies, Moody's and Fitch, also affirmed their ratings. S&P credit analyst Kevin Ahern, commenting on the revised rescue plan, said, "We expect that this will provide the company with the flexibility to continue its asset disposition plan at a more measured pace."
In early October, Liddy said AIG would auction off a number of its units to pay back $60 billion owed to the Federal Reserve. However, the ongoing credit crunch and complexity of AIG's business have slowed the process.
"We have made meaningful progress in addressing liquidity issues related to [AIG financial products] and our securities lending activities and have announced several divestitures. However, the economy and capital markets remain in turmoil and we are taking additional steps to preserve the value of our businesses and maximize the ultimate proceeds for the benefit of all stakeholders, including taxpayers," Liddy said in a statement accompanying the earnings report.
The latest action is the fourth time the government has stepped in to buttress AIG. Beginning in September, when the government gave AIG an $85 billion loan, U.S. taxpayers have pumped about $150 billion in aid to the company. Under the $60 billion line of credit, the government owns 79.9% of the company.
The continued infusion of government support raises continuing questions about how long the government will go on funding a financial institution deemed "too interconnected to fail."
"How did these folks settle on $30 billion? Why not just let AIG fail? How much more will we need to spend before we start getting our money back?" says Peter Cohan, an author and management consultant in Marlborough, Mass. "The answers to the first and third questions are: 'I don't know,' and to the second, I'd say: 'Systemically costly derivatives contracts.'"
In its earnings report, AIG said it lost $22.95 per share in the last three months of 2008. It lost $5.3 billion, or $2.08 per share, in the same quarter a year ago. Revenue fell to negative $23.8 billion, as the company had to reverse gains it recorded from investments in past quarters.
AIG shares, which spiked earlier in the day, closed unchanged at 42 cents and are down from 51.47 on Feb. 28, 2008. The stock has lost nearly all of its value since the market meltdown began in September.
The Associated Press contributed to this report