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AIG’s viability in question with new Fed loan

Concerns about the health of AIG were renewed Thursday, a day after the insurance giant said it would receive an additional $37.8 billion loan from the Federal Reserve.
/ Source: The Associated Press

Concerns about the health of American International Group Inc. were renewed Thursday, a day after the insurance giant said it would receive an additional $37.8 billion loan from the Federal Reserve.

"The bottom line is, they need more liquidity than they thought," said Mark Lane, an analyst for William Blair & Co. The new loan is on top of a two-year, $85 billion loan AIG received last month from the Fed in an effort to stay in business.

AIG shares fell 73 cents, or 23 percent, to $2.46 in late afternoon trading.

AIG is apparently facing a liquidity crunch greater than was anticipated a month ago when the U.S. government first bailed out the company.

The new loan will help AIG cover requests from clients to redeem borrowed securities. In the past, these securities were previously loaned by AIG's insurance company subsidiaries to third parties in return for cash. The cash would then be reinvested in an attempt to increase returns.

Now, Lane said, clients who borrowed securities want to return them to AIG and get their cash back.

Amid the continuing credit crisis, financial firms have been hoarding cash for fear of future losses on investments. The situation has also spooked banks into nearly shutting off lending amongst each other.

The problem is, AIG "didn't have the money to give it back," Lane said. "That means that somebody else has to step in to take that other borrower out of the transaction."

That is where the new Fed loan comes into play. The New York Federal Reserve Bank will loan AIG the $37.8 billion and in return receive the securities that AIG now holds again, Lane said.

The securities are investment-grade, fixed-income securities.

The arrangement will help AIG secure funds on an as-needed basis, the New York-based insurer said Wednesday in a statement.

On the brink of failure last month, 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 the sale of Merrill Lynch & Co. to Bank of America Corp. In return for the two-year loan, the government received warrants to purchase up to 79.9 percent of AIG.

As of Oct. 1, AIG had drawn $61.28 billion on the credit facility, of which about $54 billion has gone toward its securities lending and AIG's financial products area. The securities lending program, which is a common program among financial institutions, is the portion that is requiring the additional loan.

The rest of the money has been for other liquidity needs amid an "unprecedented" freezing of credit markets, Chief Executive Edward Liddy said last week.

AIG said last week it would sell off a number of business units to pay off its massive government loan. The company didn't specifically disclose all the assets it would sell or the expected prices from the sales. However, AIG did say 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.

The additional loan could require AIG to sell more assets.

"By them having greater liquidity needs, it would suggest that maybe they would have to cut deeper," Lane said. "But it's unclear because we don't have more details."

David Steuber, co-chair of law firm Howrey LLP's Insurance Recovery Practice Group in Los Angeles, said that to a certain extent AIG is going to have to be realistic in terms of what they are going to sell and what they are going to be able to sell it for.

The deal for the additional Fed loan comes as AIG has been castigated by lawmakers and the White House for spending hundreds of thousands of dollars on a posh California retreat just days after getting the $85 billion federal bailout.

Lawmakers investigating AIG's meltdown said they were enraged that executives of AIG's main U.S. life insurance subsidiary spent $440,000 on the retreat, complete with spa treatments, banquets and golf outings. White House press secretary Dana Perino on Wednesday called the event "despicable."

AIG issued a statement Wednesday saying that the "business event" was planned months before the Sept. 16 bailout and that it was held for top-producing independent life insurance agents, not AIG employees. Of the 100 attendees, only 10 worked for the AIG unit hosting the event, it said.

The insurer said Liddy sent a letter to Treasury Secretary Henry Paulson "clarifying the circumstances" of the event. In the letter, Liddy assured Paulson that AIG is "reevaluating the costs of all aspects of our operations in light of the new circumstances in which we are all operating."

On Thursday, the insurer said it canceled a future California retreat that was to be held later this month.