U.S. Government Restructures AIG Bailout

The government is providing new financial assistance to troubled insurance giant American International Group. It includes pouring $40 billion into the company in return for partial ownership.

The Federal Reserve said Monday the government would buy the preferred stock of AIG as part of a restructuring of a bailout package intended to prevent the company's collapse.

The government's plan will scrap the original $123 billion bailout and replace it with a new plan worth $150 billion. The plan includes lowering the interest rate on loans to the firm and establishing two facilities to buy mortgage-backed securities from AIG and collateralized debt obligations on which AIG has written credit default swap contracts, the Fed said in a statement.

The government said the actions were needed to "keep the company strong and facilitate its ability to complete its restructuring process successfully."

As part of the new arrangement, the Fed is reducing an $85 billion loan it had made available to AIG to $60 billion. The Fed also is replacing a separate $37.8 billion loan to the insurance giant with a $52 billion aid package.

Monday's announcement signaled the first time money from the $700 billion bailout package Congress enacted last month has gone to any company other than a bank.

The Treasury Department, which is overseeing the program, has promised to inject $250 billion into banks in return for partial ownership. The original notion behind the bailout package was to help financial institutions lend money more freely again. Frozen credit is one of the main reasons the economy is in danger of getting stuck in a long and painful recession.

Until Monday, all of AIG's bailout relief was coming from the Fed.

The Fed earlier this year said it would lend a total of $123 billion to AIG. The insurance company was later allowed access to an additional $20.9 billion through the Fed's "commercial paper" program, under which the Fed is buying mounds of companies' short-term debt that is often used for crucial day-to-day expenses, such as payrolls and supplies.

AIG reported Monday that continued financial market turmoil resulted in a large third-quarter loss.

The New York-based company said it lost $24.47 billion, or $9.05 per share, after a profit of $3.09 billion, or $1.19 per share, a year ago.

Results included pretax losses of $18.31 billion tied to the declining value of AIG's investment portfolio. They were also hurt by catastrophe losses and charges related to restructuring.

Excluding items, operating losses totaled $3.42 per share — missing analysts' average loss estimate of 90 cents per share, according to analysts.

In early October, AIG said it would sell certain business units to pay off the $85 billion Fed loan. The company, however, said it plans to retain its U.S. property-and-casualty and foreign general insurance businesses. It also plans to keep an ownership interest in its foreign life-insurance operations.

AIG is a colossus on Wall Street and in financial districts around the globe, with operations in more than 130 countries and $1 trillion in assets on its balance sheet.

Besides life, property and other insurance offerings, AIG provides asset-management services and airplane leases. Its myriad businesses are also linked to mutual funds, annuities and other retirement products held by millions of ordinary Americans.

But perhaps the biggest concern about AIG is the dizzying array of complex financial instruments it structured for commercial banks, investment banks and hedge funds around the globe — many of which were directly or indirectly linked to the value of U.S. mortgages.

From NPR News and the Associated Press