AIG to get additional $37.8 Billion

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(Agencies)
Updated: 2008-10-09 15:22

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 AIG in September, but it will take a different form. A spokesman for AIG, 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 AIG 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 AIG 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, AIG 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 AIG 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 AIG 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 AIG

AIG 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, AIG said, it would be able to preserve more of the Fed loan and use that money more effectively to wind down the affairs of AIG'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 AIG'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, AIG'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 AIG to lend the securities onward to the New York Fed, the Fed will allow AIG to preserve cash. It will also keep AIG 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 AIG use cash more effectively and provide enhanced credit protection to the taxpayers, who stand behind the $85 billion loan.