When the federal government agreed to a $150 billion bailout of the insurance giant AIG last fall, it imposed what were widely seen as unusually steep interest rates.
The idea was to make the bailout painful to discourage other companies from seeking government help if they could avoid it. Now, American International Group is asking the government to ease the terms of the bailout. The company says that if the terms aren't changed, it will have a lot more trouble surviving the current downturn.
The bailout was supposed to give AIG some breathing room so it could restructure and sell off some of its assets. The idea was to use the proceeds from these sales to repay the government. But it hasn't been easy.
"Obviously, it's a very difficult market out there for selling anything," says AIG spokesman Nick Ashooh. He says the company has placed a lot of its assets on the table. It's already sold off parts of the company, and there was a report on Tuesday, which the company wouldn't confirm, that it's even trying to sell a controlling share of its lucrative Asian insurance subsidiary.
Scarcity Of Buyers
But there aren't a lot of buyers right now. And meanwhile, the company is believed to have lost tens of billions of dollars last quarter. So Ashooh says AIG is asking the government to ease the terms of last fall's bailout.
"What we're focused on is finding potential new solutions to keep AIG stable and keep our businesses functioning properly while we execute our plan to sell businesses and repay the government," he says.
What's happening is a kind of borrower's remorse. Doug Roberts, chief investment officer at ChannelCapitalResearch.com, says that with the economy getting so much worse than anyone expected, big financial companies like AIG are finding it tough to live with the bailout terms they agreed to last fall.
"What you have to realize is the bailout package has gone through an evolution. It was done very, very quickly — kind of almost in a panic mode — and now they're trying to figure out what to do with it after the fact," he says.
Obama administration officials didn't comment Tuesday on AIG's request. AIG has already received additional money once before, and any effort to give it more is likely to be unpopular with Congress and the public.
Joseph Mason, professor of banking at Louisiana State University, says AIG has been badly run for years and needs to make wholesale changes in the way it's managed.
"That's extremely hard to do, and of course there's no incentive to do so as long as money keeps flowing either via the government or otherwise," he says.
A Global Connection
AIG officials say that the company is doing what it can to get back on its feet and that it has a plan to do so. But they say the continued slowdown in the credit markets and the downturn in the economy are impeding the company's efforts.
"It's important to maintain the focus on the fact that if we don't help AIG work out of this situation in a constructive way, there's a lot of potential negative impact for everyone globally, given AIG's interconnectedness with the world economy," says Ashooh, the AIG spokesman. "So it's really about helping everybody avoid further damage to the economy."
That ultimately could force the hand of federal officials, just as it did last fall. AIG remains one of those big, powerhouse companies with ties throughout the financial markets, and if it fails, it could drag down a lot of other players. After the Lehman Brothers disaster, that's something U.S. officials want to avoid at all costs.