The federal government Monday unveiled a new plan to save the troubled insurance company American International Group. It was a tacit admission that the government's efforts so far have failed to stabilize the company.
U.S. officials already had approved more than $120 billion in loans to AIG this fall to help it deal with the credit crunch. The new plan will cost taxpayers even more than that, and there are still questions about whether it can work.
The government said it was basically scrapping the bailout plan it announced with some fanfare two months ago and starting over. AIG was heavily involved with the complex mortgage-backed securities that have been at the center of the financial market meltdown. And by this summer it was running short of cash.
So the Federal Reserve agreed to lend it tens of billions of dollars, taking AIG stock as collateral. But analyst Donald Light of the research firm Celent says that fell short of what was needed to stabilize the company.
"So it was kind of the wrong remedy for problems that people were only starting to understand when they put that first bailout into place," Light says.
A Record Loss
Today AIG officials acknowledged that the company lost nearly $25 billion last quarter — a record amount.
That has forced government officials back to the drawing board. Under the new deal, the government will lend less money to the company. But it will buy an additional $40 billion in stock. And it will pay for it out of the $700 billion financial rescue fund signed into law by President Bush recently. At the same time, AIG will get easier terms to pay back the loans it already has. Not only will it pay a lower interest rate. It will also have five years to make good on its debts as opposed to two.
In an interview on CNBC today, AIG's Chief Executive Edward Liddy said the new terms would give the company more breathing room to sell off some assets and get its house in order.
"Having five years enables us to do it in a more disciplined, more rigorous way so I think we can get fair value for the assets," he said.
Limits On Compensation
In exchange for taking money from the bailout fund, AIG will have to agree to strictly limit compensation for its most senior executives. It's a sensitive issue for the company, which has already been hit with criticism for sending outside agents to a lavish resort right after getting its loan from the Fed. In addition to all this, the government will create two new special-purpose vehicles to buy up some of AIG's weaker assets. That will help the company clear some of the toxic investments off its balance sheets. Light says the new plan unveiled today will go a long way toward helping AIG find its footing.
"It is a vast improvement over the first bailout," he says. "The first bailout, while in a broad sense was well-intentioned, in a way created more problems than it actually solved."
A Bailout Precedent
The new terms announced today set a worrisome precedent for the government. Until now the companies dipping into the $700 billion bailout plan approved by Congress have all been banks and financial services companies.
This is the first time an insurance company has taken a share. White House officials insisted today that the fund was meant to cover companies like AIG. But many other companies, including hedge funds and automakers, have been lobbying for a piece of the fund. And they may use AIG to make their case that they be included too.