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AIG gets bail money

American International Group (AIG) is being bailed out by the United States government to the tune of US$85 billion.

Thursday, September 18th 2008, 7:15AM
The US Federal Reserve said it would lend AIG US$85 billion in return for a 79.9% stake in the company.

Federal Reserve officials said the move was necessary to stop AIG from filing for bankruptcy, which could further damage world financial markets as the insurer has US$1.1 trillion in assets and 74 million clients in 130 countries.

"A disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Federal Reserve's statement said.

The Federal Reserve says the purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.

The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.

The interests of taxpayers are protected by key terms of the loan. The loan is collateralised by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries.

The loan is expected to be repaid from the proceeds of the sale of the firm's assets. The US government will receive a 79.9% equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

In New Zealand AIG Life chief executive David Pierce says the company "remains in a strong position. We have been operating successfully in New Zealand for more than a quarter of a century, and while we are naturally paying close attention to AIG developments, these events do not directly affect the day-to-day operations of AIG Life, as we work solely in the New Zealand market.

"The insurance policies written are direct obligations of AIG Life in New Zealand. We will continue to operate in the normal course of business to meet these obligations.

"AIG Life is fully committed to maintaining required capital levels to meet the needs of our customers," Pierce says.

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