Feds add bailout cash to insurer's lifeline

WASHINGTON — When the government offered an emergency loan to insurer American International Group (AIG) in September, eyebrows shot up at the $85 billion price tag. Now it looks like pocket change.

The size of the lifeline swelled to more than $150 billion Monday, a record for a private company, expanding an aid package that's gradually grown since it began as the $85 billion loan in September.

The new package includes a $40 billion chunk of the $700 billion financial bailout. It's the first time money from the big rescue bill has gone to any company other than a bank.

The big question: Will the bailout be enough to stabilize the firm?

Here are some questions and answers about the rescue plan.

Q. So, the original bailout plan didn't work?

A. Even with the government's original $85 billion lifeline in September (in return for a nearly 80 percent ownership stake), AIG continued to have problems as the country's overall financial and credit conditions worsened. The company was burning through cash and was saddled with risky mortgage-related securities that continued to deteriorate in value after the initial bailout.

Then, on Oct. 31, AIG was allowed to access $20.9 billion more through the Federal Reserve's "commercial paper" program. That's where the Fed buys mounds of short-term debt from the companies, which often used the money for crucial day-to-day expenses, such as payroll and supplies.

AIG on Monday reported a massive third-quarter hit. It lost $24.47 billion and revenue fell 97 percent compared to the third quarter of 2007.

"This is the largest quarterly loss we've ever reported," Chief Financial Officer David Herzog told investors on a conference call.

Q. What's different about the new bailout?

A. The new package reduces the interest rate AIG will pay and will extend the loan term to five years from two, reducing the need to sell off business lines and other assets at fire-sale prices to repay the government.

In addition, the new arrangement replaced the second $37.8 billion Fed loan to AIG with a $52.5 billion aid package. Under that part of the plan, the Fed will fund the purchase of both residential mortgage-backed securities from AIG's portfolio, plus collateralized debt obligations, which are complex financial instruments that combine various slices of debt.

By removing these troubled assets from AIG's balance sheet, the bailout should take stress off the company, giving it more breathing room and helping to prevent future losses, Fed officials said.

The Fed doesn't believe it will suffer losses because it is hopeful the market for such distressed investments will recover as the economy and financial markets eventually rebound.

Q. Why is it important to keep AIG afloat?

A. It is a global colossus, with operations in more than 130 countries. It is so interconnected with other financial firms that its problems have a jolting ripple effect both in the United States and abroad.

AIG was pushed to the brink of bankruptcy in September when its credit rating was downgraded and it could not post the collateral required under the "credit-default swap" contracts it had issued. Credit-default swaps are a type of corporate debt insurance.

The Fed raced to the rescue at that time to prevent AIG's failure, which could have triggered billions in losses at other banks and financial firms that bought these swaps from AIG — sending them into failure as well.

Q. In exchange for the money, will the government place any restrictions on AIG?

A. Yes. Neel Kashkari, the Treasury Department official serving as the interim head of the $700 billion bailout program, said: "AIG must comply with stringent limitations on executive compensation for its top executives, golden parachutes, its bonus pool, corporate expenses and lobbying."

Q. What company might be next in line for a government bailout?

A. Auto companies — General Motors, Ford and Chrysler — have been pressing the government for more financial assistance. The money would be on top of the $25 billion in loans Congress passed in September to help retool auto plants to build more fuel-efficient vehicles.

Kashkari, however, was circumspect. "This morning's action with AIG was a one-off event necessary for financial stability. It is not the establishment of a new program," he said in New York.