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Tonya
"Cyniquian" Level Poster
Username: Tonya
Post Number: 7582
Registered: 07-2006
Rating: N/A
Votes: 0 (Vote!) | | Posted on Thursday, October 09, 2008 - 12:05 pm: | 
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AIG Bailout Hit by New Cash Woes
By LIAM PLEVEN, SUDEEP REDDY and CARRICK MOLLENKAMP
The federal government said Wednesday it would lend American International Group Inc. as much as another $37.8 billion, a sign that its initial $85 billion effort to shore up the company is coming up short.
The move, which comes less than a month after the Federal Reserve agreed to bail out the giant insurer, raises questions about whether the government will need to keep injecting money into the troubled company. So far, the Fed has agreed to make nearly $123 billion available to AIG.
The government's original plan was that the initial loan would allow AIG to meet its obligations as they came due, buying it time to sell assets. The proceeds of those sales would be used to pay back the loan. As of Oct. 1, AIG had drawn down $61 billion. The Federal Reserve is expected to indicate Thursday the latest borrowing figure. AIG hasn't yet announced any significant asset sales.
The government's deepening involvement underscores its view that a failure of AIG could have devastating consequences for the global financial system. The government has a major interest in the fate of the company, because it took an 80% ownership stake in exchange for extending the original loan. Now, it is effectively loaning money to itself to keep its own insurance company afloat.
"How could this company have gotten itself into a position where it is reliant on the government for almost $125 billion of liquidity funding?" asks David Havens, a credit analyst at UBS. "Eighty-five billion was breath-taking."
An AIG spokesman said that "it's just an extraordinary situation in the markets." He added that the new plan "is part of our effort to arrive at an overall solution." He said it is designed to help the company avoid needing to borrow the full $85 billion, and that it was not a sign that the initial plan was faltering.
The Fed action comes during a week in which the government has taken unusually aggressive steps to revive global markets, from lending directly to nonfinancial corporations to participating in a world-wide coordinated interest-rate cut. The government already is facing considerable risk from its seizure of mortgage giants Fannie Mae and Freddie Mac, and its $700 billion program to take troubled assets off the books of financial firms.
The terms of the latest injection show how far AIG's problems extend beyond losses stemming from complex credit derivatives, which helped lead to the company's downfall. AIG now faces extensive losses from a program that involves securities held by highly regulated units that sell life insurance policies.
The new plan is aimed at easing the strains from that program, under which AIG lent out securities to third parties, and received collateral in return. That program is costing AIG dearly, because it had invested some of that collateral in other assets, including mortgage-backed securities. Some of those assets lost value.
When the borrowers of the securities returned them, and asked for their money back, AIG had to make up the difference out of pocket, putting further strains on its coffers. Some trading partners were unwilling to keep borrowing securities from AIG, so the company was unable to lend them back out for fresh collateral. The Fed is essentially offering to be that borrower: it will take up to $37.8 billion worth of securities from AIG, and give the company cash in return.
When the Fed devised the initial $85 billion loan program, it didn't anticipate that financial conditions would deteriorate as much as they have in recent weeks, with key credit markets freezing for a wide range of businesses. The market turmoil put additional funding pressure on AIG's regulated subsidiaries, which are the safest piece of the AIG portfolio.
With the latest move, the Fed is trying to buy the company more time to sell assets, which it hopes will increase the ultimate value of its 80% stake. The Fed did not expect asset sales to happen immediately; the initial loan had a two-year term.
The Fed considers the transactions in the new lending program to be relatively low-risk. The securities are highly rated investment-grade debt that state regulators allow insurers to invest in. The Fed will apply its normal "haircuts," taking some percentage off the collateral value to protect against losses. The lending also will be backed by assets of the regulated insurance subsidiaries, which weren't included in the original loan.
Such securities-lending woes are not limited to AIG. Other insurance companies and institutional investors, including pension and mutual funds, have similar programs designed to allow them to squeeze out a few extra bucks by lending out the securities in their portfolios. But the recent turmoil in the credit markets has turned some of the programs, which have long been reliable money makers, into money losers.
At the end of June, AIG owed securities borrowers $75.1 billion for collateral it had taken in, while the value of the collateral reinvested was $59.5 billion, according to a company filing with the Securities and Exchange Commission. Since then, the credit crunch has worsened.
The Fed now finds itself in a tricky political position with AIG. Few if any lawmakers and aides knew how quickly much of the $85 billion had been tapped, and they were not given much warning of the Fed's latest move. They displayed frustration at a congressional hearing Tuesday, where they grilled two former AIG chief executives.
The bailout bill enacted last week requires the Fed to quickly report to top lawmakers when it invokes the authority it used to extend the new money. As a result, the central bank will likely face questions about what limits there might be on future money.
Meanwhile, federal prosecutors are looking back at the events that put the company into such a precarious position. A federal probe started earlier this year is looking into whether AIG executives misled investors about financial products that helped cause the company's downfall, and whether executives misled AIG's outside auditor, PricewaterhouseCoopers LLP, according to a person close to the matter.
Congressional testimony about the firm's collapse showed that AIG may have prevented its own internal auditor from examining how it was valuing credit-default swaps, which are contracts linked to subprime mortgages, and other debt that led AIG to take several multi-billion-dollar write-downs. The company has said it is cooperating with the investigations by the Justice Department and Securities and Exchange Commission.
AIG's risks extend around the globe. It had a big business helping European banks significantly decrease the amount of capital they had to set aside to cushion against losses. According to AIG's most recent annual report, filed in February, the company issued credit protection for more than $300 billion of corporate loans and residential mortgages, the bulk of which was issued for European financial institutions. Daniel Gros, director of the Centre for European Policy Studies in Brussels, estimates that banks would have to find some $25 billion in fresh capital to counter an AIG default.
—Damian Paletta and Amir Efrati contributed to this article.
Write to Liam Pleven at liam.pleven@wsj.com, Sudeep Reddy at sudeep.reddy@wsj.com and Carrick Mollenkamp at carrick.mollenkamp@wsj.com
More
Fed statement on AIG loans
Copy of the letter from Liddy to Paulson
Copy of the letter from lawmakers to Paulson
http://online.wsj.com/article/SB122348485787515823.html?mod=special_page_campaig n2008_mostpop
AIG Not Sorry For Spending Your $$
http://www.forbes.com/markets/2008/10/08/aig-washington-retreat-face-markets-cx_ lal_1008autofacescan01.html |
Disciple724
Veteran Poster
Username: Disciple724
Post Number: 212
Registered: 07-2008
Rating: N/A
Votes: 0 (Vote!) | | Posted on Thursday, October 09, 2008 - 12:13 pm: |
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Sorry Tonya,
It ain't your money any more, cash is a bearer note. It belongs to whoever is holding it. |
Chrishayden
"Cyniquian" Level Poster
Username: Chrishayden
Post Number: 7475
Registered: 03-2004
Rating: N/A
Votes: 0 (Vote!) | | Posted on Saturday, October 11, 2008 - 10:11 am: |
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It ain't your money any more, cash is a bearer note. It belongs to whoever is holding it.
(You are such a weak suck up it is pathetic) |
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