$30 billion more for ailing AIG
The government gave ailing insurer American International Group Inc. $30 billion more in loans Monday, renewing doubts about the effectiveness of federal bailouts and triggering another avalanche on Wall Street that pushed the Dow index below 7,000 for the first time in a dozen years.
U.S. Treasury and Federal Reserve officials also eased conditions on terms from some of the three earlier attempts to prop up the giant company, which also reported a staggering quarterly loss of $61.7 billion on Monday.
The latest effort to bolster AIG and continued problems at other financial giants such as Bank of America Corp. and Citigroup Inc. -- along with a slew of gloomy economic forecasts recently -- had led many investors to question whether the government’s efforts to rescue the financial system were working, analysts said.
“We’ve reached the point of disgust with Washington,” said Peter Boockvar, equity strategist at New York brokerage house Miller Tabak & Co. “Every day there’s a new plan, and every day there’s a new bailout. I think bailout fatigue is gripping the market.”
The Dow Jones index of 30 blue-chip stocks dropped nearly 300 points Monday to 6,763.29, the first time the widely watched gauge has fallen below 7,000 in nearly 12 years. In January and February, the Dow fell almost 20% -- the worst first two months of the year in its 113-year history.
The financial crisis has made it increasingly dangerous to let AIG fail because its tentacles continue to extend throughout the global financial system. Therefore, its implosion could set off a chain reaction of failures at banks and other institutions worldwide.
On Monday, stocks across Europe suffered their biggest losses since December in the wake of AIG’s news, along with the refusal of West European nations to provide new financial support to the struggling East. Investors also took note of financier Warren Buffett’s statement that the U.S. economy was in a “shambles.”
The changes made to AIG’s loan terms recognized a painful reality. Though the initial pact called for selling off pieces of the company to repay federal loans, the credit crisis has made it difficult for potential buyers to raise the cash necessary for purchases.
The government still considers AIG too big to fail. As a result, the White House decided that the $150-billion commitment already made -- the largest financial infusion to date -- was not too big to get bigger.
“The Treasury Department and others felt that the systemic risk of doing nothing was simply unacceptable,” said White House Press Secretary Robert Gibbs, who did not rule out giving still more money to AIG. “We’re focused on taking the steps necessary to restructure AIG so that it, in the long run . . . no longer poses the type of systemic threat that it poses right now.”
Treasury and Fed officials added a $30-billion credit line, which the company can draw on as needed, to strengthen AIG’s capital structure after the company posted its huge loss for the final three months of last year, a record for a publicly held U.S. company.
Analysts said that a potential failure of AIG still posed a major danger to the economy even as the company tries to scale down and become less intertwined with the financial system.
“I think there’s a clear understanding in Washington that you can’t back away,” said Len Blum, managing director of Westwood Capital, a New York investment bank. Still, he said, “it could end up being a black hole. At some point the government’s got to cut it off.”
Even as it teeters, AIG retains a prodigious presence in finance. With operations in 130 countries, it has more than 30 million policyholders in the United States and 74 million worldwide. It insures the property of nearly every Fortune 500 company and is a leading source of retirement insurance for teachers and nonprofit groups, among others.
But more central to its problems, AIG provided about half a trillion dollars’ worth of insurance to banks and other financial institutions through complex instruments called credit-default swaps. In essence, AIG insured riskier mortgage-backed securities and other investments that have helped fuel the broader economic meltdown.
“If AIG can’t make its payments, its customers experience losses or defaults, and their customers do the same,” said Russell Walker, a risk management expert at Northwestern University. “It’s like a domino. Once it’s started, you can’t just stop it.”
For that reason, the Fed, with the backing of the Treasury, lent AIG $85 billion in September to prevent an immediate collapse. The government received warrants for the right to buy 79.9% of AIG’s stock.
Essentially in control of the company, federal officials replaced top management and directed AIG to start selling off its assets so that credit-default swaps wouldn’t drag down its largely healthy insurance business and the company would not pose a grave risk to the global financial system.
AIG has been trying to sell units. But even though it has received expressions of interest, the credit crunch has made it difficult for prospective buyers to raise money, said Chief Executive Edward Liddy.
“The reality is that the really large and most valuable assets . . . that’s what’s causing people to somewhat gag because they don’t have the capital to be able to do it,” he told investors and analysts Monday.
The Bush administration expanded the AIG bailout twice last fall, giving the company access to about $150 billion. The latest increase is expected to give AIG more time so it can avoid having to accept fire-sale prices and return more to taxpayers.
Liddy said the firm did not need the cash now but would use the credit line as a backstop.
Treasury officials said the long-term goal was “an orderly restructuring and refocusing of the firm.” But it said it might take more money if financial conditions didn’t stabilize.
The Treasury also will exchange $40 billion of the AIG preferred shares it has for new preferred shares that “more closely resemble common equity.” The strategy is similar to the one the Obama administration used Friday to convert up to $25 billion in Citigroup preferred shares to common shares, which strengthens the company’s balance sheet.
But the moves increase the risk to taxpayers if the institutions fail.
In addition, AIG will repay up to $26 billion in existing loans from the Fed with preferred interests in two valuable subsidiaries, American Life Insurance Co. and American International Assurance Co. AIG has used about $38 billion of a $60-billion credit line the Fed extended last year.
Donn Vickrey, co-founder of Gradient Analytics, an independent stock research firm, said he expected AIG eventually would need $40 billion more from the federal government. The company has reduced its holdings of credit-default swaps to about $300 billion and is selling other assets, but the process is sluggish.
“They’re slowly but surely unloading these things, but it’s going to take some time,” he said. “Unfortunately, they’re just woven throughout the system. There’s no way to get them out quickly.”
The additional federal money for AIG could end up helping the company’s former longtime chief executive, Maurice “Hank” Greenberg. He is the largest shareholder after the government and stands to gain if the stock price recovers and assets are liquidated in an orderly fashion.
Current CEO Liddy told Bloomberg Television that Greenberg was responsible for some of AIG’s problems. Greenberg, who was forced to retire in 2005, led the company when it began entering riskier businesses. Greenberg, in turn, has sharply criticized Liddy.
On Monday, Greenberg launched a securities fraud lawsuit against AIG, alleging it produced misleading information that led him to acquire stock in his deferred compensation plan at an inflated value.
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AIG at a glance
An overview of American International Group businesses:
INDIVIDUAL AND COMMERCIAL INSURANCE
Includes auto, property, travel, workers’ compensation, environmental, marine, aviation and directors and officers liability coverage
Life, annuities, and accident and health insurance
Aircraft leasing, real estate lending and securities investments
Institutional investing, brokerage services and mutual funds