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Last updated: November 10, 2008 11:12 am
AIG is to receive a revised $150bn US government bail-out package that will allow the troubled insurer to reduce interest payments and give it more time to sell assets and save itself from collapse.
The deal will increase the government’s aid to the stricken insurer from $123bn to $150bn but leave the federal authorities to reap most of the gains if AIG’s troubled assets recover in value.
The new plan – which comes less than two months after the Federal Reserve took an 80 per cent stake in AIG in exchange for an $85bn rescue loan – was confirmed on Monday.
The renegotiation of the bail-out, which could be politically controversial, came after AIG rapidly used up most of the government original facility, raising fears that it could run out of cash.
Under the new plan, which was approved by AIG’s board after a weekend of talks between the insurer, the New York Fed and the US Treasury, the government will swap the $85bn two-year loan for a $60bn, five-year loan.
The interest rate of the loan will be reduced from 8.5 per cent over the London interbank borrowing rate to 3 per cent over Libor.
AIG will pay only 75 basis points in interest on the portion of the loan it does not use, instead of 850 basis points currently.
The government will also use a recently announced $700bn facility to buy some $40bn in preferred shares in AIG. The shares will carry an annual interest rate of around 10 per cent.
That is the same as the one being paid by Fannie Mae and Freddie Mac, the mortgage finance groups that have been nationalised, but is double the interest rate charged to the banks that have received a Treasury cash injection.
The government’s stake in the insurer will remain unchanged at 79.9 per cent, according to people close to the situation.
The Fed will also take over AIG’s troubled credit default swaps and the mortgage-backed assets in the company’s securities lending unit – the two divisions that caused the insurer’s near-collapse in September.
The continued fall in the value of those assets has drained billions of dollars from AIG’s battered balance sheet by forcing it to put up extra capital to its counterparties.
Under the new plan, the Fed will put $30bn in a new vehicle that will purchase some $70bn of AIG’s CDSs from its counterparties. AIG will contribute $5bn to the vehicle.
If, over the next few years, the value of the CDSs increases from the current depressed price, the Fed will keep two-thirds of the profits, with AIG getting the rest.
The regulators will also invest $22.5bn in debt, with AIG putting up $1bn in equity, into a second vehicle that will purchase the residential mortgage-backed securities held in the insurer’s securities lending unit.
If the value of those assets rises, the Fed will keep the majority of the gains. A $37.5bn liquidity facility provided by the Fed to AIG’s securities lending unit, which lent securities to investors in exchange for fees that were invested in the toxic mortgage assets, will be cancelled.
AIG is advised by Blackstone.
The decision to renegotiate the AIG rescue could be controversial for the Fed, at a time of rising political opposition to the injection of taxpayer’s money into financial institutions.
Tim Geithner, the president of the New York Fed, is a candidate to become Treasury secretary in Barack Obama’s administration.
AIG officials counter that the new deal was needed to stave off a collapse that would have wreaked havoc on global capital markets. The insurer had already used $81bn of the combined $122.5bn Fed facility and Edward Liddy, AIG’s chief executive, had warned that it might run out of cash.
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