AIG Pact With U.S. Sidelines Stockholders

He said also that "this is a very expensive facility to have in place, let alone use. That will be another motivation to move quickly to reconfigure the company and then pay off the loan."

Analysts at Credit Suisse calculated that the added costs related to the undrawn part of the facility will be an extra $4.7 billion of annualized interest expense for the current $55 billion of the undrawn line.

Credit Suisse analysts Thomas Gallagher and Michael Zaremski also said, "It is unclear whether AIG would be able to access the debt or equity markets prior to a large amount of asset sales."

As a result, the Credit Suisse analysts said, they expect the stock to pull back from its recent gain, up above $5 after being below $2 during the height of last week's crisis as the company teetered on bankruptcy.

AIG released details of the agreement late yesterday. It was apparently completed earlier in the day, a week after the Fed and Treasury Department agreed to help AIG avoid filing for bankruptcy by providing an $85 billion, two-year loan.

The government was forced to step in after the credit markets became closed to AIG as it sought to raise new capital needed to meet covenants under credit default swap contracts AIG entered into with counterparties seeking insurance on financial instruments that were backed by subprime loans that are plunging in value.

At the same time, the Federal Bureau of Investigation confirmed that it has opened "preliminary investigations" into possible fraud involving AIG, Fannie Mae and Freddie Mac, and Lehman Bros., the center of the global financial crisis the U.S. government is now trying to calm, according to the Associated Press.

Earlier in the day, Securities and Exchange Commission Chairman Christopher Cox testified before a Senate Banking Committee hearing that it is investigating insurers as well as other participants in the subprime mortgage business that is at the center of the financial crisis.

The Credit Suisse analysts also said the latest AIG statement appeared to doom an initiative by large outside investors in AIG to forge an alternative to the government loan.

"There had been speculation that AIG could seek a private sector solution and thus avoid the government dilution, but the company indicated that this deal with the Fed represents its best option given the market turmoil," said Credit Suisse.

AIG Chief Executive Officer Edward Liddy noted this specifically in commenting on the final deal with the government.

"AIG made an exhaustive effort to address its liquidity needs through private sector financing but was unable to do so in the current environment," Mr. Liddy said. "This facility was the company's best alternative."

"We are pleased to have finalized the terms of the facility and are already developing a plan to sell assets, repay the facility and emerge as a smaller but profitable company," said Mr. Liddy.

Importantly, he added, "AIG's insurance subsidiaries remain strong, liquid and well capitalized."

But Credit Suisse analysts voiced caution about the ability of AIG to remain an industry leader.

"Given the heavily leveraged capital structure at present, it's highly likely that AIG will need a large equity infusion over the course of the next year if it does intend to operate certain core businesses as going concerns (and not sell them). Thus, risk of further dilution is high, in our view," said Credit Suisse.

Regarding the specifics of government involvement, AIG said that under the deal, AIG will issue a new series of convertible participating serial preferred stock to a trust that will hold the preferred stock for the benefit of the United States Treasury.

The preferred stock will be entitled to participate in any dividends paid on the common stock, with the payments attributable to the preferred stock being approximately, but not in excess of, 79.9 percent of the aggregate dividends paid, AIG said.

The preferred stock will vote with the common stock on all matters and will hold approximately, but not in excess of, 79.9 percent of the aggregate voting power, AIG said.

The preferred stock will be convertible into common stock following a special shareholders meeting to amend AIG's restated certificate of incorporation.

An analyst source said, "This tells me that shareholders have no more clout. It implies that existing shareholders are now holders of a minority stake in the company and therefore the government has complete voting control of the company."

This article updated Sept.25, 10:07 a.m.