AIG: What A Country

The Federal Reserve and the U.S. Treasury Department have announced a restructuring of the AIG rescue package. As with the original plan (and most of the other rescues), the authority to take these actions is granted under Section 13(3) of the Federal Reserve Act.

http://www.federalreserve.gov/aboutthefed/section13.htm


There are several moving parts:

- The original $85 billion loan will be reduced to $60 billion. The interest rate will be dropped from 3 month LIBOR + 850 basis points to 3 month LIBOR + 300 basis points. AIG will have 5 years from the original date to pay off the facility, instead of the original 2 years.

- The supplementary loan (10/8/08 collateralized borrowing) of $37.8 billion will be repaid.

- The U.S. Treasury will purchase $40 billion of preferred shares in AIG. These funds are part of the Troubled Asset Relief Program (TARP), but will not reduce the $250 billion dedicated to supporting financial institutions. The $40 billion is a part of the $100 billion that will be authorized by President Bush. The shares will pay a 10% dividend.

- The remainder of the new funds will be used to acquire assets to support AIG's balance sheet and credit default exposure. Two limited liability companies will be formed to house the assets. (This is similar to the method used to purchase those Bear Stearns assets on behalf of JP Morgan: Maiden Lane, LLC. The details of the LLC can be monitored weekly in the Fed's H.4.1 release.):

----- One facility will acquire residential mortgage backed securities that are currently held by AIG. $22.5 billion will be provided by the Fed and $1 billion will be funded by AIG. The Fed's loan will be secured by ONLY the holdings of the LLC. AIG will absorb the first $1 billion of losses.

----- The second facility will acquire collateralized debt obligations (CDOs). $30 billion will be provided by the Fed and $5 billion will be funded by AIG. The Fed's loan will be secured by ONLY the holdings of the LLC. AIG will absorb the first $5 billion in losses. The purpose here is to decrease the exposure AIG has to credit default swaps (CDS). AIG, in essence, sold insurance to protect owners of CDOs. As the the CDOs declined in price, the CDS would increase in value. So, if the new LLC acquires the CDOs, the owners would be able to unwind the CDS that they purchased and reduce AIG's liability.

In review:

Old deal: $122.8 billion

New deal: $152.5 billion

Wow. First, AIG needs some bucks to stave off failure. Next, they need a little bit more cash. Then, they need to restructure the whole thing because they can't pay their bills. It would be nice if the citizens who actually make all of this possible with their tax payments could participate was well.