Published March 3, 2009

AIG stuns with massive loss, gets US$30b lifeline

US$61.7b Q4 loss is biggest in corporate history, federal officials say they have no choice but intervene

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(NEW YORK) In a troubling sign that the financial crisis is far from over, the US government yesterday agreed to provide another US$30 billion to the American International Group and loosen the terms of its huge loan to the insurer.

The intervention comes as the insurance giant, understood to be too big to be allowed to fail, reported a US$61.7 billion fourth quarter loss, the biggest quarterly loss in corporate history. For the year, AIG lost US$99.3 billion, against a profit of US$6.2 billion for 2007.

In the quarter, AIG took a US$21 billion charge related to taxes and wrote down US$25.9 billion in assets, including mortgage-backed securities and credit default swaps.

The company's general insurance business lost US$2.8 billion compared with a profit of US$2.1 billion in the quarter a year ago. Premiums dropped 16.3 per cent to US$9.2 billion and earnings from premiums fell 5.9 per cent to US$10.98 billion.

The government intervention would be the fourth time that the United States has had to step in to help AIG avert bankruptcy. The government already owns nearly 80 per cent of the insurer's holding company as a result of the earlier interventions, which included a US$60 billion loan, a US$40 billion purchase of preferred shares and US$50 billion to soak up the company's toxic assets.

Federal officials said they thought they had no choice but to prop up AIG, because its business and trading activities are so intricately woven through the world's banking system.

But the deal also presents more financial risks to taxpayers at a time when the public and Congress have been sharply questioning the wisdom of risking federal money to bail out private enterprises.

The government's commitment to AIG far eclipses its rescue of other financial companies, including Citigroup, which has received US$50 billion in rescue financing, and Bank of America, with US$45 billion.

Credit rating agencies like Moody's, Fitch Ratings and Standard & Poor's had been preparing to sharply downgrade AIG's credit ratings yesterday because of the record quarterly loss. That would have forced AIG to default on its debt, threatening to set off shock waves throughout the financial system as banks holding AIG derivatives contracts would probably demand cash collateral and other payments from AIG during a time when it has little to spare.

The rating agencies were briefed on the pending deal between AIG and the government, the people involved in the talks said, and they have committed not to downgrade the company's debt as a result.

'The steps announced today provide tangible evidence of the US government's commitment to the orderly restructuring of AIG over time in the face of continuing market dislocations and economic deterioration,' the Treasury said.

The Dow Jones average plunged below 7,000 in early morning trade after the AIG announcement as investors grew increasingly pessimistic about the health of banks.

Under the deal, the government will commit US$30 billion in cash to AIG from the Troubled Asset Relief Program, should the company need it, the Treasury said. AIG is not expected to draw down the money immediately, but the government's commitment was enough to satisfy the rating agencies.

Another part of the deal would allow AIG to exchange US$40 billion in preferred non-voting shares, which paid a 10 per cent dividend, for new preferred shares that do not require a dividend. That would save AIG US$4 billion annually.

The government would also agree to lower the interest rate on all remaining AIG debt to match the London Interbank Offered Rate. That will save AIG US$1 billion in interest payments. To further ease AIG's debt burden, instead of paying back US$38 billion in cash with interest that it has used from a federal credit line, government will convert that into equity in two of AIG's subsidiaries in Asia - American International Assurance and the American Life Insurance Co. Both are performing well. -- NYT, Bloomberg, AP