AIG Projected To Lose $60 Billion In Q4 ‘08

Here is an update on the latest with the never ending debacle that is AIG (AIG):

From The WSJ:

American International Group Inc. is seeking an overhaul of its $150 billion government bailout package that would substantially reduce the insurer’s financial burden, while further exposing U.S. taxpayers to its fortunes, people familiar with the matter say.

Under the plan, the government loan of up to $60 billion at the heart of the bailout would be repaid with a combination of debt, equity, cash and operating businesses, such as stakes in AIG’s lucrative Asian life-insurance arms. AIG and the government have been discussing the changes since December and plan to announce them by Monday when the insurer is expected to report fourth-quarter results, the people said.

The earnings report is expected to underscore AIG’s worsening condition with its total loss for the quarter likely to top $60 billion, these people said.

One of the restructuring plan’s central goals is to safeguard AIG’s credit ratings, which, if cut, would force it to make billions of dollars in payments to its trading partners, further weakening its already precarious financial position. The new plan is being structured in close consultation with major credit-rating agencies.

AIG’s talks with the government are ongoing and while they are at an advanced stage the deal may still fall apart or change significantly.

Government approval would signal a complete turnabout in its approach to the insurer since it first intervened to rescue it: from that of a creditor to one of a potential owner.

At the time of the original bailout in September, the government imposed what many considered onerous interest rates and deadlines for AIG to repay its loans by selling off assets. It quickly became clear, however, that the erosion of the value of AIG’s assets and worsening financial crisis would make it difficult to meet the goals without jettisoning assets at fire-sale prices.

Graphics courtesy of WSJ

$60 Billion in one Quarter?! That’s nearly $15 billion more than Exxon-Mobile raked in over the course of 2008. Methinks the government needs to come up with a better plan for resolving this situation. While I understand the reasons why the government had to rescue AIG I’m not sure that continuing to pour money down the AIG hole is going to get the job done, because it’s starting to look like this company is going to require 100s of billions of dollars before all is said and done. 100s of billions that may never be repaid to the taxpayer.

What really needs to happen is that the government needs to find a way to unravel the nonsensical derivatives contracts, CDSs, etc, sold by AIG’s infamous financial products unit, so as to mitigate the risks to the banking industry if AIG were to eventually collapse/become too expensive for the government to support.  There is no reason to believe that AIG won’t continue to lose huge sums of money for the foreseeable future, and it makes sense to find ways to remove the risk the company represents for the banking industry rather than just using taxpayer dollars to prop it up.

When a company is in a position where not only has it lost $60 billion over the course of three months, but is potentially on the hook to have to make billions worth of payments to its trading partners if its credit ratings are cut. It’s time to start thinking of other ways to exit the situation other than merely providing the company with loans, asset back-stops, etc.

Graphics courtesy of WSJ

You can read more here.

Source:

The Wall St. Journal: “AIG Seeks to East Its Bailout Terms” — Matthew Karnitsching, Liam Pleven, Serena NG, February 24, 2009.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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