By Hugh Son, Zachary R. Mider, and Rebecca Christie
March 2 (Bloomberg) -- American International Group Inc., the insurer deemed too important to fail, may get as much as $30 billion in new capital and have debts to the U.S. forgiven in the firm’s third bailout, people familiar with the matter said.
AIG agreed to give stakes in its two biggest international life insurance divisions to the government to erase some of the New York-based firm’s approximately $37 billion in debt, said three people, who declined to be named because the plan hasn’t been announced yet. AIG may post a record fourth-quarter loss of about $60 billion, the people said.
The insurer, first saved from collapse in September with a package that grew to $150 billion last year, had to ask for help again after failing to sell enough units to repay the U.S. Firms including banks relied on AIG to back more than $300 billion of assets through derivative contracts as of Sept. 30, making the company a “systemically significant failing institution” that has to be propped up, according to the Treasury.
“The government has accepted all the downside with little chance of upside,” said Phillip Phan, professor of management at the Johns Hopkins Carey Business School in Baltimore. “They are trying to protect the global financial system from a complete meltdown.”
The U.S. will be entitled to proceeds from the eventual sale of the two life units, American Life Insurance Co. and American International Assurance Co., and a 5 percent dividend from the new trusts that will hold the businesses, the people said. AIG continues to seek bidders for the operations, which span five continents, a person said.
Life Insurance
AIG may try to pay back the $37 billion within two months, partly by turning over the life units and giving the government rights to the cash flow from tens of thousands of life insurance policies, said one of the people. The insurer may wind up having to put up cash as well to retire the debt, the person said.
AIG will be subject to the most severe of compensation limits on companies getting government aid, according to another person familiar with the situation. Those restrictions were strengthened in the $787 billion stimulus bill enacted last month. The Treasury may release new guidelines on the limits as soon as this week, the person said.
Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben S. Bernanke concluded AIG’s latest rescue was the least costly of several alternatives the U.S. had to prevent an economic collapse caused by the firm’s failure, the person said.
The role of the government has shifted from that of short- term lender -- entitled to interest at the 3-month London Interbank offered rate plus 8.5 percent for a two-year loan under the first bailout -- to a longer-term equity investor.
More Capital
“We priced their capital punitively and forced them to sell things fast; that hasn’t worked either so we’re having to pump in more capital,” said Haag Sherman, who helps oversee $8 billion as chief investment officer of Houston-based Salient Partners. “This probably won’t be the last time AIG has to come to the trough.”
AIG will also separate the unit that provides property and liability coverage for commercial clients and may sell a 19.9 percent stake to the public within 12 months, one of the people said. That business, which was previously intended to be the core of AIG after the U.S. rescue, has lost employees and may get a new brand to distance itself from AIG. The insurer’s shares plunged about 90 percent since its September bailout.
The U.S. Treasury agreed to pump as much as $30 billion more into the company by buying preferred equity of AIG if the insurer needs it, one person said, adding to the $40 billion capital investment the government made last year. David Monfried, an AIG spokesman, and Isaac Baker of the Treasury declined to comment.
Global Decline
AIG sought a revised bailout after the global decline in financial firms thinned the pool of potential buyers for units, increasing the chance that auctions wouldn’t raise enough money to pay back AIG’s loans. Under the new plan, AIG will be under less pressure to divest assets as it continues to seek buyers for operations including an aircraft-leasing business, an auto insurer, and a retirement-services operation.
The insurer had been in talks in the past week with regulators to restructure its bailout to stave off credit-rating downgrades that would have caused further costs tied to credit- default swaps. AIG got an $85 billion federal loan in September after credit-rating downgrades left the company facing more than $10 billion in potential payments to debt investors who bought swaps from the insurer to protect against losses.
Downgrades by Moody’s Investors Service and Standard & Poor’s would force AIG to post more than $7 billion in collateral to counterparties, the insurer said in a November filing. AIG’s units may also lose access to the U.S. commercial paper program if they are downgraded, the company said.
Liddy’s Plan
Chief Executive Officer Edward Liddy, appointed by the government to run AIG in September when the insurer agreed to turn over an 80 percent stake to the U.S., had struck deals to raise about $2.4 billion through asset sales. Under Liddy’s plan, revealed in October, AIG was to emerge as a firm mostly providing property-casualty coverage to businesses.
Liddy said AIG was on the “road to recovery” after securing a bailout valued at $150 billion in November. That package included the $60 billion credit line, a $40 billion capital investment and $50 billion to wind down liabilities tied to mortgage-backed securities the insurer owned or backed through swaps. Liddy said then that terms of the original rescue, disclosed a day after Lehman Brothers Holdings Inc. collapsed, were unsustainable.
Under Investigation
AIG is winding down the trades and closing the unit that sold the swaps. The unit is under investigation by the U.S. Department of Justice, the Securities and Exchange Commission and U.K.’s Serious Fraud Office. The U.S. probes involve how AIG executives valued its swap portfolio and disclosed information about the contracts to investors, AIG said in a November regulatory filing.
AIG, once the world’s largest insurer, operates in more than 100 countries, providing protection to individuals and businesses. It insures against some of the biggest risks, covering planes and commercial shipping and providing protection against terrorist attacks.
The biggest insurers in North America posted more than $150 billion in writedowns and unrealized losses linked to the collapse of the mortgage market from the start of 2007, with AIG representing more than a third of that total. The company has units that insure, originate and invest in home loans.
The U.S. Senate’s banking committee has scheduled a hearing for March 5 to discuss AIG’s bailout and the government involvement. New York Insurance Superintendent Eric Dinallo and Donald Kohn, vice-chairman of the Federal Reserve Board of Governors, were scheduled to testify.
To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Zachary R. Mider in New York at zmider1@bloomberg.net; Rebecca Christie in Washington at rchristie4@bloomberg.net
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