Monday, March 2, 2009
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It seemed like last year when the government passed on helping Lehman because it was a waste of time, and instead deciding AIG was more important. They were too big to fail.
Wait, it was last year. Now they need more, much more. This bailout seems to have been a mistake, but we won't know for sure if a domino effect would have followed and collapsed the market. Better safe than sorry, maybe. A comparison would be the scare of 2000 computer glitch where companies spent millions and billions to make sure nothing would shut down.
However, this smells like a desperate attempt by a gambler to double down and walk away a winner. The odds are against it.
Latest results show AIG showed a loss of 60 billion dollars. The following is an excerpt from MSNBC to try to make sense of it all.
Once one of the world's largest insurers, AIG has already received $150 billion in loans from the government. In return the government has taken an 80 percent stake in the insurer.
That latest AIG rescue comes just days after the government agreed to boost its equity stake in Citigroup to as much as 36 percent in a bid to bolster another financial giant that taxpayers had already poured billions of dollars into AIG.
Under the new deal, the US Treasury and the Federal Reserve would provide about $30 billion in fresh capital to the insurer, lower the interest rate on a $60 billion loan and ease the terms of a $40 billion preferred share investment.
The $30 billion would not be injected immediately but would be provided as a standby line of equity that AIG could tap as its losses mount, the Wall Street Journal reported, citing people familiar with the matter.
AIG will repay much of the $40 billion it owes the Federal Reserve with equity stakes in two AIG overseas units — Asia-based American International Assurance and American Life Insurance, which operates in 50 countries. Repayment was originally supposed to be made in cash with interest, the Journal reported.
AIG will place foreign units of AIA and Alico into trusts, with the Fed holding preferred shares in the trusts, a source told CNBC. AIG and the US haven't agreed on a valuation for AIA or Alico, the source said. AIG plans eventually to take AIA and Alico public when market conditions improve, this person said.
In addition, AIG will securitize $5 billion to $10 billion in debt, backed with life insurance assets, to further reduce its debt burden.
And the $60 billion Federal Reserve credit facility AIG received in November will be reduced to $25 billion. The interest rate on that loan will drop to the three-month Libor rate, reducing the interest burden by 1 billion annually, a source told CNBC. AIG has already drawn down about $38 billion of those funds.
An AIG spokesman was not available for comment. The F$ederal Reserve Bank of New York, which is handling the government loan, did not return requests for comment Sunday afternoon. Treasury Department spokesman Isaac Baker declined to comment.
AIG has been forced to seek more help because of a combination of factors including the recession and its falling stock price, now well under $1.
Perhaps its biggest problem has been that asset sales that were supposed to help the company pay back government loans aren't happening, in part because the credit crisis that initially landed AIG in trouble last summer is also preventing would-be buyers from getting financing to complete such deals.
As of Feb. 13, AIG had sold interests in nine businesses.
In November, the U.S. government restructured previous loans provided to AIG, giving the company about $150 billion in total as part of a rescue package to help the insurer remain in business amid the worsening credit crisis. That package replaced earlier loans, including the original $85 billion lent in September, after it became apparent the insurer needed more funds.
Problems at AIG did not come from its traditional insuran ce operations, but instead from its financial services units, and primarily its business insuring mortgage-backed securities and other risky debt against default.
Shares of AIG closed at 42 cents on Friday. The stock, which traded at $49.50 a year ago, has lost nearly all of its value since the market meltdown began in September.
Slideshow: Origins of the Financial Crisis ... Then and Now
—CNBC's David Faber contributed to this report, as did the AP and Reuters
© 2009 CNBC