Filed Under:Carrier Innovations, Regulation/Legislation

AIG Biggest User Of Fed Commercial Paper Lending Facility

NU Online News Service, Dec. 2, 3:51 p.m. EST

American International Group was the apparent biggest user of the Federal Reserve Board's short-term lending facility after it ran into financial trouble starting in September 2008, according to documents released by the Fed Wednesday.

According to the Fed data, some of which has been disclosed by AIG in various securities filings, AIG started using the Fed's Commercial Paper Funding Facility in late October 2008, and used it for short-term funding while the regular markets were closed to it 90 times over 15 months.

AIG borrowed $60.2 billion from the commercial paper program in October 2008, when the Fed launched the program to help companies that were having trouble obtaining short-term loans in the private market.

According to AIG spokesman Mark Herr, AIG completed repaying the commercial paper facility in April of this year.

Besides AIG, the documents show that the only other property and casualty insurer to use the Fed credit facility during the troubled period was Hartford Financial Services Group. The Hartford used the program nine times over the program's first three months, borrowing a total of $724.5 million.

Other U.S. insurers that used the Fed credit facility during the period were Prudential Financial, MetLife, Lincoln National and Genworth Financial.

A number of companies, including General Electric, Verizon, mutual funds, hedge funds and foreign banks with U.S. operations also used various Fed credit programs to raise cash during the troubled period.

The Fed documents also detail borrowings from other Fed facilities, including loans and the Troubled Asset Relief Program, by AIG while it sought to stay in business during the height of the economic downturn in 2009 and 2010.

According to AIG officials, AIG currently owes the federal government in various facilities $95.6 billion, including funds owed to the TARP program, the credit facility and other borrowings. That includes interest, according to Mr. Herr.

The data released by the Fed was mandated by the Dodd-Frank financial services law.

AIG needed a federal bailout primarily because of its Financial Products unit, which sold credit default swaps on up to, at one time, $2.77 billion in mortgage-backed securities (MBS).

When the market perceived the value of these securities declining, the holders of the MBS sought more collateral from AIG, but the credit markets closed off for the company.

Ultimately, AIG was forced to accept a loan of up to $85 billion from the Fed's emergency lending facility in exchange for 79.9 percent of its stock in mid-September 2008.

AIG was also forced to use high-quality securities held in its life insurance subsidiaries to provide collateral for MBS it had purchased on credit.

According to the Fed data, AIG started borrowing on that $85 billion Sept. 23, 2008, with a loan of $42 billion. It borrowed its peak amount of $72 billion on Oct. 22, 2008, and the amount dropped to $69.25 billion Nov. 24, 2008.

A day later it dropped rapidly to $34 billion, and AIG currently owes $14 billion in principal on that facility.

AIG also owes $30 billion in two Fed facilities, Maiden Lane II and III, used to hold mortgage-backed securities that used to be held by its life insurance subsidiaries.

Maiden Lane II owes $14.1 billion and Maiden Lane III owes $15.1 billion as of Sept. 30.

Both of these are self-paying, according to Mr. Herr, with AIG sharing profits with the Fed as the value of these fixed-income securities likely increases.

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