The U.S. Treasury Department announced Monday that it is purchasing $40 billion in American International Group, Inc. (AIG) stock. The stock purchase is part of a new plan that scraps the previous AIG bailout and is far less costly than the original federal loan to the embattled insurer announced in mid-September.
"Together with steps taken by the Federal Reserve, this restructuring will improve the ability of the firm to execute its asset disposition plan in an orderly manner," the Treasury Department said in a statement. "AIG will use the equity to pay down $40 billion of the Federal Reserve's secured lending facility."
In a separate statement, the Federal Reserve announced that the new loan program would "establish a more durable capital structure, resolve liquidity issues, facilitate AIG's execution of its plan to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the U.S. government and taxpayers."
The new plan overhauls the original $85 billion bailout package provided to AIG by the federal government to prevent the company from collapsing. Under the revised bailout deal, the federal government will reduce the original loan provided to the company to $60 billion and will buy $40 billion of AIG's preferred shares in return for partial ownership.
Part of the restructured loan is a freeze on bonuses for the top 70 company executives, as well as limiting the "golden parachutes," or executive compensation packages.
The revised package is expected to give AIG's chief executive officer Edward Liddy additional time to salvage the company, which was rescued from bankruptcy by the U.S. government on September 15 after three quarterly losses that exceeded $18 billion. Efforts to repay the original $85 billion loan stalled as plunging financial markets forced potential buyers to shore up their own balance sheets.
The troubled insurance giant reported a hefty net loss for the third quarter compared to a profit in the same period last year, hurt by the financial dislocation in the global markets as well as catastrophe losses and charges related to ongoing restructuring-related activities.
The company's net loss for the third quarter was $24.47 billion, or $9.05 per share, compared to net income of $3.09 billion, or $1.19 per share, in the same period last year.
AIG's adjusted net loss for the quarter was $9.24 billion, or $3.42 per share, compared to adjusted net income of $3.49 billion, or $1.35 per share, in the year-ago quarter. On average, fourteen analysts polled by First Call/Thomson Financial expected the company to report a loss of $0.90 per share for the quarter. Analysts' estimates typically exclude special items.
Additionally, the company's net loss and adjusted net loss for the quarter include a pre-tax charge of about $7.05 billion for a net unrealized market valuation loss related to the AIG Financial Products Corp. super senior credit default swap portfolio and a pre-tax net loss of $1.09 billion for a credit valuation adjustment on AIG Financial Products Corp.'s assets and liabilities.
The changes in the bailout package follow widespread criticism from some large shareholders of the original package, which would have required AIG to quickly sell assets in a declining market while also paying steep interest rates on its loans from the government.
The revised bailout plan from the government is designed to enhance the company's ability to sell assets for a decent price and the taxpayer's ability to recover the money that has been pumped into the beleaguered insurer. The new package aims to shift many of the risks once absorbed by AIG to the government, potentially exposing the government to billions of dollars in future losses.
Edward Liddy, Chairman and CEO of AIG said, "Today's actions send a strong signal to our policyholders, business partners and counterparties that AIG is on the road to recovery. Our comprehensive plan addresses the liquidity issues that threatened AIG, and gives us the financial flexibility to complete our restructuring process successfully for the benefit of all of our constituencies."
Shares of AIG have moved higher on the news and are currently trading up $0.55 or 26.1% at $2.66 on a volume of 38.1 million shares.
by RTT Staff Writer
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