WASHINGTON (AFP) — The US government announced Monday an expanded bailout for insurance giant AIG of more than 150 billion dollars, as the Treasury tapped into emergency funds originally set for banks.
The latest bailout plan, the largest in US history, came as AIG burned through billions of dollars of cash and reported a third-quarter loss of 24.47 billion dollars.
The original Federal Reserve rescue of 85 billion dollars in mid-September, at the time the largest in corporate history, was expanded by 37.8 billion dollars just a few weeks later, and involved the government acquisition of a 79.9 percent stake in the troubled insurer.
But AIG, the world's largest insurer before the global credit crisis, has continued to suffer from soured bets on credit default swaps (CDS) and other complex financial instruments amid a financial crisis that accelerated in October.
Under the revised program for AIG announced Monday, the Treasury will replace the entire previous package with a larger, longer-term 152.5 billion dollar program, including a 60 billion dollar five-year loan and 52.5 billion dollars to buy up distressed securities.
The Treasury will tap its Troubled Asset Relief Program (TARP) for 40 billion dollars to buy preferential shares in the company.
"This action was necessary to maintain the stability of our financial system," said Neel Kashkari, the head of the US Treasury's 700 billion dollar rescue operation for the financial industry established in October.
"We recognize that the financial system remains fragile and we continue to stand ready to prevent systemic failures," he said.
The White House emphasized the huge risk of an AIG failure and defended the Treasury's extension of the financial lifeline to the insurer.
Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke "have determined that a failure by the firm would cause damage to our financial system, the US economy and the global economy," White House spokeswoman Dana Perino told reporters.
"Today's announcement is new proof that the TARP will be used more and more to bail out distressed companies -- and not only banks -- instead of its initial goal of buying toxic assets," Marie-Pierre Ripert, analyst at Natixis.
The rescue came as AIG reported its balance sheet deteriorated quickly over the third quarter.
The company said it took 15 billion dollars in provisions, reporting that in addition to losses in its credit default swaps portfolio and securities lending business, its general insurance division was in the red to the tune of 899 million dollars, compared with a profit of 2.51 billion dollars a year ago.
AIG chief executive Edward Liddy defended the expanded aid from Treasury, saying it puts AIG "in a much better position" to address its problems and set it toward recovery.
The extra money gives AIG "more flexibility and more time" to sell assets.
"It is a smart, disciplined process," he said in a conference call with reporters.
"AIG is, in fact, on the road of recovery."
The Treasury rescue, however, suggests that AIG's recovery period could be much longer than anticipated just a few months ago.
In the new program, the previous 85 billion dollar loan is cut to 60 billion, and a lower interest rate is set, but its duration is extended to five years from two.
Another 52.5 billion dollars is provided to purchase distressed assets from the company, including 30 billion for collateralized debt obligations and 22.5 billion for residential mortgage-backed securities.
Thirdly, the government will use 40 billion dollars in TARP funds to buy AIG preferential shares, which will carry a high interest rate of 10 percent.
Defending the deal, Kashkari said the government was setting "stringent" limitations on executive compensation for AIG's senior executives, corporate expenses, and lobbying.
AIG shares were up 8.53 percent at 2.29 dollars in afternoon trading.
The expanded bailout for AIG from a fund originally set aside for banks was likely to raise eyebrows in the US Congress. According to a Treasury official, President-elect Barack Obama, who is already crafting strategies for the economy ahead of his inauguration on January 20, was briefed Sunday on the Treasury's new AIG plan.
The Treasury insisted Monday its exposure to AIG would have a limited lifespan.
"The US government intends to exit its support of AIG over time in a disciplined manner consistent with maximizing the value of its investments and promoting financial stability," it said in a statement.
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