The US Treasury joined with the Federal Reserve yesterday in unveiling a new package of assistance measures to AIG, the insurance goliath, including an additional $30bn (£21bn) in loans, as the company reported losses in the fourth quarter of 2008 totalling $61.7bn, the biggest in US corporate history.
What will be the government's third attempt to shore up the once-mighty AIG – American International Group – did nothing to relieve pressure on equity markets. However, it did mean that the company had forestalled what might have been a lethal additional reduction in its credit ratings.
"The long-term solution for the company, its customers, the US taxpayer, and the financial system is the orderly restructuring and refocusing of the firm," the Treasury and the Fed said in a joint statement. "This will take time and possibly further government support, if markets do not stabilise and improve."
As an additional $30bn in Tarp bail-out funds were made available to it, AIG agreed to new restructuring steps that will include the government taking a $26bn stake in two of its global insurance units, American International Assurance, based in Asia, and American Life Insurance Company (Alico). Additional measures will have the effect of cutting the interest rates that AIG must pay to the Federal Reserve.
US officials consider that AIG, best known in Britain as a sponsor of Manchester United, poses a "systemic risk" if were to fail, potentially causing a domino-effect collapse of financial institutions globally. But there are political risks involved in the government repeatedly throwing money at companies whose problems are perceived to have been created through years of greed and blind-eye risk-taking.
With these latest measures, the US taxpayer is now on the hook with AIG to an amount of more than $150bn, more than three times the $50bn so far made available to Citigroup, for instance.
The chief executive, Edward Liddy, conceded that AIG is on the road to becoming something very much smaller as the restructuring gathers pace. He said that taxpayers would be repaid for the investment in it, but was unable to guarantee that the third bailout would be the charm with no further need for government assistance. The worsening equity markets have hampered his attempts at divesting units.
For the full year, AIG's losses amounted to a staggering $99.3bn, against a profit of $6.2bn in 2007. The company's fall was largely triggered by its financial products unit based in London, which led the charge to insure mortgage-backed securities held by other institutions with so-called credit- default swaps – a strategy that blew up in AIG's face when the mortgage market began to dissolve.Reuse content