From David Goldman of CNNMoney.com
Troubled insurer American International Group got a reworked $152.5 billion deal from the federal government Monday, as the Federal Reserve and Treasury Department made significant changes to the terms of the company’s original bailout.
The Fed announced that it will reduce AIG’s original $85 billion bridge loan to $60 billion, and it will cut the interest rate by 5.5 percentage points.
In addition, the Treasury will use its special authority under last month’s $700 billion bailout law – the so-called Troubled Asset Relief Program – to purchase $40 billion in preferred stock.
The new bailout was worked out between government officials and AIG executives over the weekend. AIG was having difficulty paying back its original bridge loan, which it intended to use to sell off many of its subsidiaries to restore the company to a stable condition. But the credit crisis has proven to be a difficult environment to spin off assets.
To keep the company operational, and to ensure that the government gets repaid and can eventually divest from the company, the Fed will also create a new program that will purchase up to $22.5 billion of AIG’s troubled mortgage-backed securities. It will also post $30 billion to backstop its credit default swap agreements, taking place of a $37.8 billion lending facility it previously offered the company.
Like many other financial institutions, AIG’s mortgage-backed securities have turned into “toxic” balance sheet assets. The government, by purchasing the troubled assets and backstopping its credit default swap agreements, hopes investors will stop requesting collateral increases so the company can focus on spinning off its other companies.
Many taxpayers have expressed anger at the government’s bailout, saying it rewards risky and unscrupulous behavior of corporations. But Liddy said taxpayers have much to benefit from an equity stake in AIG.
To protect taxpayers, the Treasury said its $40 billion capital injection into AIG is not part of the $250 billion that was set aside for equity purchase of banks. Rather, the funds came from an additional $100 billion that President Bush requested. As a result, the transaction’s “one-off” status allowed the government to impose more stringent criteria on executive compensation than on banks receiving Treasury assistance.
As part of the new deal announced Monday, Treasury will limit “golden parachutes” (but they still get their money) and freeze the size of the annual bonus pool for the top 70 company execs. Most banks participating in the Treasury program face compensation curbs on only their top five executives.
AIG has come under fire from lawmakers and state officials for seeking to make big payouts to former executives and planning pricey corporate events after receiving the federal loans.
In mid-September, AIG (AIG, Fortune 500) teetered on collapse, pressured by the effects of the credit crisis. Worried that the company’s failure would domino through the rest of the financial system, the government provided AIG with an $85 billion bridge loan. Later, the Fed gave the insurer $37.8 billion line of credit, and made available $20.9 billion in a debt purchasing facility.
Under the new plan, AIG has borrowed the full $40 billion from the Treasury to pay off the $37.8 billion from the Fed. It has drawn down $21 billion of its reduced $60 billion bridge loan, and it has borrowed $15.3 billion of the $20.9 billion it can borrow from the Fed’s Commercial Paper Funding Facility.
Have you people had enough of this crap yet? (Comment mine and mine alone)