AIG Might Need Even More Federal Aid, Feds Warn

After committing another $30 billion this morning, even more government aid might be needed down the road to keep American International Group in business, federal officials warned this morning.

Meanwhile AIG Chairman and Chief Executive Officer Edward Liddy said it will take time to restore the carrier's independence from government support because of the size of the company and the poor economy.

In a joint statement, the Treasury and the Federal Reserve Board warned that because of the "systemic risk" AIG poses to the world financial system, "restructuring will take time and possibly further government support, if markets do not stabilize and improve."

Mr. Liddy, during a conference call following an earnings report that indicated AIG lost nearly $100 billion last year, acknowledged it will be difficult for AIG to sell off assets and free itself of dependence on government support, given the problems plaguing the economy, as well as the company's sheer size.

"The measure of the health of the investment-sensitive portion of our industry is down 52 percent year-to-date as of last Friday--that's [in] two months," he said, adding that "it is down over 70 percent since I became CEO of AIG in late September."

He also said the company is aware that despite the challenges, AIG must move quickly if it wants to prevent further erosion in the company's market share. "The marketplace is a pretty crummy place to be right now," he observed.

Mr. Liddy said he is working to reorganize core businesses into "clearly separate, independent" companies "worthy of investor confidence."

Mr. Liddy's statement on the conference call and the Treasury-Fed joint statement appeared to make the same point--that AIG poses a systemic risk to the entire world financial system, and must therefore be stabilized.

He justified giving an ownership interest to the government in exchange for the stock of American Life Insurance Company and American International Assurance Company to pay off the $38 billion AIG owes the Fed under a credit facility.

"This will allow AIG to cap the intrinsic value of its insurance companies [and] to repay a portion of the government credit facility," he said, adding that "it will accelerate AIG's restructuring plant and position these businesses as independent companies."

AIG will continue to operate the two life companies, and eventually could sell or take them public, sources told NU.

AIG also said today it would form a general insurance holding company that will include its Commercial Insurance Group, Foreign General unit and other property-casualty operations. The new unit will be called AIU Holdings Inc., with a management and brand "distinct from AIG," the company said.

Among other steps taken today, the Treasury and the Federal Reserve will provide a facility providing $30 billion in fresh capital to the insurer, if needed, through the Treasury's Capital Purchase Program.

The company's chief financial officer, David Herzog, also noted during the conference call that most of the funds AIG has received from the Treasury and the Fed since the government took 79.9 percent of the company in exchange for $85 billion in cash on Sept. 16, 2008, has gone to other companies.

"Most of the funds coming into AIG were turned over to other institutions, which benefited the entire financial sector," Mr. Herzog noted.

Earlier, Mr. Liddy detailed the scope of AIG's interconnection with the world financial system.

"We operate in more than 130 countries and jurisdictions, and have approximately 74 million customers and policyholders," he said. "We're the world's largest property-casualty insurer. We are the largest provider of retirement savings to primary and secondary school teachers and healthcare workers."

Mr. Liddy said AIG has $2 trillion involved in its financial products businesses, with over $1 trillion of that concentrated with 12 major global financial institutions.

"We're one of the largest life insurance providers in the U.S. and in Asia," he said, adding that "we insure the property of 94 percent of the Fortune 500 companies..."

He added that "if AIG would have failed, the impact on our customers and counterparties would have undermined an already unsettled global financial system."

While Mr. Liddy and other AIG executives spoke, the Treasury and Fed announced that under the restructured deal with the government, the Treasury will get a 77.9 percent stake in AIG as of Tuesday.

The joint Treasury-Fed statement this morning included a revised term sheet that calls for the Federal Reserve Bank of New York to take up to a $26 billion preferred interest in the two AIG life insurance subsidiaries, as well as make $8.5 billion in new loans to benefit the domestic life insurance subsidiaries of AIG.

In addition, the interest rate on the existing credit facility will be modified to reduce the existing floor, saving AIG an estimated $1 billion in interest annually over the cost of the original Sept. 16 agreement--and since revised three times, the Treasury estimated.

"Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high," the two federal agencies concluded.