Government Increases AIG Bailout to $150 Billion

WASHINGTON/NEWYORK (Reuters) – The Federal Reserve hiked its support for insurerAmerican International Group Inc to about $150 billion on Monday afteran initial bailout attempt failed to stem massive losses.

Under the new plan, the government is putting $150 billion at AIG’sdisposal, $27 billion more than it extended previously. But the newpackage will leave the government exposed to billions of dollars ofpotential losses.

AIG shares rose 24 percent to $2.62 in premarket trade after the new rescue plan was disclosed.

The restructured bailout was announced as AIG posted a $24.47billion third-quarter loss, the largest in the company’s 89-yearhistory, hurt by massive losses on investments and billions of dollarsof insurance claims from hurricanes that battered the U.S. Gulf Coastearlier this year.

The Fed will buy $40 billion of AIG preferred shares through theTreasury’s Troubled Asset Relief Program (TARP), lend it $60 billionunder a credit facility, and provide $50 billion to buy distressedsecurities and backstop AIG’s securities lending portfolio.

The new plan is nearly double the government’s initial $85 billionrescue plan for AIG, forged on September 16. The government said itsequity stake in the insurer would still be about 80 percent.

The preferred shares will carry a dividend of about 10 percent. The U.S. will charge a lower interest rate on its loan to AIG.

AIG, once the world’s largest insurer by market value, received the$85 billion bailout financing from the government in September aftercounterparties and rating downgrades forced the company to post largeamounts of collateral for credit derivatives positions. Last month,$37.8 billion in additional federal funds were put at its disposalunder a securities lending agreement. The new plan replaces both ofthose facilities.

On Monday, the Fed lowered the interest rate on AIG’s creditfacility to three-months LIBOR plus 3 percentage points from thecurrent LIBOR plus 8.5 percentage points, and extended the term of theloan to five years from two years.

The Fed said in a statement, "These new measures establish a moredurable capital structure, resolve liquidity issues, facilitate AIG’sexecution of its plans to sell certain of its businesses in an orderlymanner, promote market stability, and protect the interests of the U.S.government and taxpayers."

AIG Chief Executive Edward Liddy said the terms of the new bailout"create a durable capital structure that will make possible an orderlydisposition of certain of AIG’s assets" and assure taxpayers are repaidin full with interest.

Credit default swap agreements have led AIG to record $18 billion inlosses over the past three quarters. Mounting collateral calls left itseverely short of cash.

The U.S. Treasury said its $40 billion investment would subject AIG– which it called a "systemically important company" — to the samecurbs on executive bonuses and golden parachutes as other financialinstitutions that receive government capital injections.

AIG reported a third-quarter net loss of $24.47 billion, or $9.05 ashare, compared with a year-earlier profit of $3.09 billion, or $1.19 ashare.

A year ago, AIG’s stock was trading at about $57. It closed at $2.11on Friday, off an all-time low of $1.25 in the hours before the federalgovernment stepped in with the initial $85 billion loan.

(Reporting by Mark Felsenthal in Washington and Lilla Zuill in New York; editing by John Wallace)