Rescue Me? AIG Needs Another Government Bailout

The Recurring AIG Nightmare

As the well known quote from “The Christmas Story” goes, OHHHHHH FUDGE………..

Only Ralphie didn’t say “fudge” and we certainly aren’t either, especially when it comes to the AIG (AIG) situation.

As CNBC reported Monday night, AIG is in talks with the US government over a new bail-out aimed at giving the stricken insurer, which is already 80 per cent-owned by the authorities, fresh capital to absorb an expected fourth-quarter loss and more time to sell assets.

People close to the situation said AIG could announce the new rescue plan as early as next week, together with fourth-quarter results that are likely to show a loss bigger than the $24.5bn reported in the previous three months.

AIG Downgrades as well?

That massive loss is likely to spur downgrades in its insurance and credit ratings that will force AIG to raise collateral that it doesn’t have.

In addition, if AIG’s book value falls below a certain level, as it seems certain to do, it will trigger default in certain of its debt instruments, say people familiar with the situation.

All of this adds up to a huge headache for the Federal Reserve and Treasury, which have already provided over $150 billion of assistance to AIG.

A new bail-out of AIG would be the third time in five months that the US taxpayers have come to the rescue of a company that was once a global insurance powerhouse and is now fighting for its survival.

Under the planned bail-out, which has not yet been finalised and could still change, the government would swap some of the $60bn five-year loan it extended to AIG in November, and maybe some of the $40bn in preferred stock it owns, for equity.

The debt could also be swapped for new obligations with different terms in order to give AIG more time to repay the loan. The company has been slow in selling off assets to pay back the government aid as potential buyers struggled to raise funds.

In return for the additional capital, AIG could cede ownership of some of its businesses or assets to the government. The government would then securitise them, putting them in discreet funds to be managed by outside managers.

What would AIG’s statement be if they didn’t Decline to Comment?

AIG said in a statement it had not yet reported results and would provide an update when it does so in the near future.

AIG declined to comment on the size of its fourth-quarter losses but confirmed the talks with the authorities. “We continue to work with the Federal Reserve Bank of New York to evaluate potential new alternatives for addressing AIG’s financial challenges,” it said.

The US Treasury and the Fed declined to comment. People close to the situation said that AIG and the government would try to keep the authorities’ stake in the company to about 80 per cent but added that the Fed and Treasury could take full control of some of the insurer’s businesses or portfolio of assets.

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