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AIG - After the Bailout
It's been five months since American International Group Inc. received its first massive cash bailout from the U.S. government, a move that put the New York-based insurer front and center in a financial crisis that was just starting to get ugly.
A lot of the early headlines about the financial meltdown contained the letters "AIG." It was the among the first companies to be questioned last year about lavish spending by executives, to cut compensation packages and to face investigations by U.S. and foreign authorities.
The government maintains that it needed to step in, saying AIG's failure would further disrupt markets and threaten the already fragile economy. Though critics of the move worried about taxpayers being on the hook for billions of dollars in bailout money if the government kept stepping in to help troubled financial companies.
How has AIG been doing since it started getting government help? Here are some questions and answers.
Q: How much money has the government given AIG?
A: On the brink of failure in September, AIG was bailed out when the government offered it an $85 billion loan during the ongoing credit crisis that saw Lehman Brothers Holdings Inc. file for bankruptcy protection and Merrill Lynch & Co. get sold to Bank of America Corp. Less than a month later, the insurance giant received an additional $37.8 billion loan from the Federal Reserve, and later was granted the ability to access up to an additional $20.9 billion under a new program where the Fed would buy commercial paper — short-term debt often used for day-to-day expenses — from the company.
In November, the U.S. government restructured its loans to AIG, giving the company about $150 billion in total as part of a rescue package to help the company remain in business amid the worsening credit crisis. That package replaced earlier loans after it became apparent the insurer needed more funds. It included a $40 billion cash infusion from the $700 billion financial bailout the government announced late last year. The government is buying preferred shares of AIG stock, giving taxpayers an ownership stake in the company. In turn, restrictions have placed on executive compensation at the firm. As part of the package restructured in November, the government is also spending up to $53 billion to buy up mortgage-backed assets and other AIG contracts on debt. AIG spokeswoman Christina Pretto said the government has not exercised all its warrants — in other words, its right to acquire AIG stock — with the company.
Q: Why did they need the money in the first place?
A: AIG found itself strapped for cash as it was hit hard by deterioration in the credit markets and concerns that the complex, structured investments it insures would increasingly default.
Problems at AIG did not come from its traditional insurance operations, but instead from its financial services units, and primarily its business insuring mortgage-backed securities and other risky debt against default. If AIG couldn't make good on its promise to pay back soured debt, investors feared the consequences would pose a threat to the U.S. financial system — and that's what led to the government bailout.
Q: How much has AIG paid back?
A: In October, AIG said it would sell off a number of business units to repay the initial $85 billion Fed loan. The loan, which was reduced in size to about $60 billion under the restructured rescue package the government put together in November, had roughly $35 billion outstanding as of last week.
The company has not specifically disclosed the assets it is selling or the expected prices from the sales. However, AIG has said it plans to retain its U.S. property and casualty and foreign general insurance businesses, and plans to retain an ownership interest in its foreign life insurance operations.
Q: How much of the company has AIG sold off?
A: As of Friday, AIG had already sold interests in nine businesses.
While terms of each deal have not been disclosed, "AIG is focused on repaying the government and the taxpayers, selling assets, and preserving the value of AIG's diverse businesses," Pretto said.
Q: Has the bailout been successful?
A: Without knowing specifically how AIG is spending the money it's received from the government, it is difficult to know if AIG's bailout package has helped.
"To the extent the bailout was able to give them a bridge that would enable them to discard or separate the good business from the bad business, I think they have been able to do that," said David Steuber, co-chair of law firm Howrey LLP's Insurance Recovery Practice Group in Los Angeles. And despite all the financial woes, AIG's traditional insurance subsidiaries have widely been viewed as safe, Steuber said. AIG operates insurance and financial services businesses ranging from property, casualty, auto and life insurance to annuity and investment services. "As the global economic landscape continues to change, AIG is constantly evaluating new options to achieve its goal of repaying the government and maintaining the vitality of our insurance and other businesses around the world," Pretto said. Even with the government help, though, AIG's future remains questionable, wrote Morningstar analyst Bill Bergman in a recent note to clients. "The range of future possibilities for AIG remains wide," Bergman wrote last week. "The potential for asset sales at distressed prices could well leave shareholders with nothing."
Q: How has AIG's position in the industry changed?
A: Once one of the world's largest insurers, AIG's demise has opened the door for other insurers to gain market share.
While the current environment is a difficult one for selling assets, "the companies AIG is selling are well-run, profitable businesses that could not be re-created today in some of the world's most desirable markets," Pretto said. Still, not everyone is raising their hand to buy up pieces of the company.
Like AIG, other insurers have taken losses on investments in debt such as collateralized debt obligations and mortgage-backed securities, too. CDOs are investments backed by pools of mortgages or other assets. They have plummeted in value since the credit crisis erupted more than a year ago as investors fled all but the safest forms of debt. As a result, there aren't a lot of insurance companies in a position to be buying anything right now. "I'm not sure there were that many really financially strong or strong enough companies that were competing with AIG to really take as big of an advantage as perhaps they hoped for," Steuber said
For more info about life insurance, contact Vince or Morgan at Paramount Life Insurance. Tel: (800) 554-9142