Fed Throws Life Preserver to AIG

The Federal Reserve Board has thrown a life preserver to American International Group by allowing the Federal Reserve Bank of New York to issue an $85 billion line of credit to the troubled insurer. According to the Fed, the loan "will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy." The facility has a 24-month term with an interest rate tied to the three-month London interbank offered rate plus 850 basis points. In return, the government gets a 79.9% equity stake in AIG. Eric Dinallo, the New York state insurance superintendent, will chair an AIG Task Force created by the National Association of Insurance Commissioners that will approve the sale of all AIG insurance assets. "Even as it is virtually impossible to expect the homeowner to sell their $1 million home at a fair price in just one week, it is also very difficult for large companies like AIG to sell assets and raise capital in short periods of time," said Gilbran Nicholas, chairman of the CMPS Institute. "The only difference between AIG and the homeowner in this scenario is in the number of zeros involved. The U.S. government is the only entity that is large enough to help AIG raise enough funds in such a short period of time in order to help the company maintain its financial obligations." The loan from the Fed gives them that time, and taxpayers stand to profit because they just became AIG's biggest shareholder at virtually no cost other than the short-term Fed loan, he said. AIG lost $5.86 billion in the second quarter, which included unrealized market losses on super-senior credit default swaps of $3.6 billion. Operating losses at AIG's United Guaranty Corp. mortgage insurance subsidiary totaled $440 million for the quarter.