Troubled insurer American International Group Inc. (AIG) said Tuesday evening that it has completed a $40 billion preferred stock sale to the U.S. Department of Treasury under the Troubled Assets Relief Program in return for partial ownership by the Treasury. The company intends to use the proceeds from the sale to reduce its outstanding borrowings under the original credit agreement extended by the Federal Reserve Bank of New York in September.
The New York-based AIG said that the Treasury purchased 4 million shares of AIG Series D Preferred Stock and a warrant to purchase a number of shares of common stock of AIG equal to 2% of the issued and outstanding shares of common stock of AIG for $40 billion under the Troubled Assets Relief Program, or TARP.
The Series D Preferred Stock at $5 par value per share will pay a dividend of 10% annually. The warrant has a term of ten years and is exercisable for up to 53.79 million shares of common stock, at an exercise price equal to the par value of the common stock at time of exercise.
A few weeks ago, AIG announced a restructuring of the original $85 billion bailout package provided to it by the federal government in September, intended to prevent the company from collapse. The U.S. government stepped in to rescue the company from bankruptcy threat after three quarterly losses by the company exceeded $18 billion, mainly due to credit default swap agreements.
However, efforts by AIG, once the world's largest insurer, to repay the original loan stalled as plunging financial markets forced potential buyers to shore up their own balance sheets.
Under the revised $152 billion bailout package that includes lower interest rates, the federal government said it will reduce the original bridge loan provided to AIG to $60 billion from $85 billion, and will buy $40 billion of AIG's preferred shares in return for partial ownership. The government will also purchase $52.2 billion of mortgage securities owned or backed by the company and will establish two facilities for the purpose. The revised package is expected to give AIG's chief executive officer Edward Liddy additional time to salvage the company.
Meanwhile, AIG is under pressure to limit executive compensation after the bailout by the U.S. government. The company said earlier on Tuesday that its CEO Edward Liddy will receive an annual base salary of $1 for 2008 and 2009 as part of a voluntary restriction on executive compensation adopted by the company. AIG said Liddy will not get an annual bonus in 2008 and 2009, although he may be eligible for a special bonus for extraordinary performance payable in 2010. Liddy's initial compensation will consist entirely of equity grants.
The announcement comes days after New York Attorney General Andrew Cuomo sent a letter to AIG, questioning about the company's executive compensation practices.
Also under the voluntary restrictions, AIG's Vice Chairman and Chief Restructuring Officer Paula Rosput Reynolds, who joined the company last month, will not receive salary or bonus whatsoever in 2008. The other five members of the company's top-seven-officer leadership group will also not receive annual bonuses for 2008 or salary increases through 2009, AIG said in a statement. In addition, 50 of its next-highest executives will not be receiving salary increases or bonuses through 2009.
There were allegations that AIG was spending lavishly with the funds received as part of its bailout on seminars, conferences and meetings. AIG stirred controversy last month when it held a week-long retreat at the costly St. Regis Resort in California, where rooms can cost more than $1,000 a night, less than a week after it received $85 billion as part of the U.S. government's bailout program.
Executive perks and bonuses have become a hot topic at a time when many Americans are losing jobs and struggling to repay loans. Compensation to executives and management has come under the scanner after missteps by banks and their top management contributed to the financial crisis.
AIG closed Tuesday's regular trading session at $1.77, unchanged from the prior day, on a volume of 48.82 million shares. The stock has been trading in a range of $1.25-$62.30 in the past 52 weeks.
by RTTNews Staff Writer
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