The government on Monday provided new financial assistance to troubled insurance giant American International Group, including pouring $40 billion into the company in return for partial ownership.
The action, announced jointly by the Federal Reserve and the Treasury Department, was taken as it became increasingly clear that an original financial lifeline thrown to AIG in September would not be sufficient to stabilize the teetering company. All told, the moves boost aid to the company to around $150 billion.
The $40 billion infusion comes from the recently enacted $700 billion financial bailout package. The government is buying preferred shares of AIG stock, giving taxpayers an ownership stake in the company.
As part of the new arrangement, the Federal Reserve is reducing a $85 billion loan it had made available to AIG to $60 billion. The Fed also is replacing a separate $37.8 billion loan to the insurance company with a $52 billion aid package.
The actions were needed to "keep the company strong and facilitate its ability to complete its restructuring process successfully," the government said.
It marked the first time money from the $700 billion bailout package Congress enacted last month has gone to any company other than a bank.
The Treasury Department, which is overseeing the program, has promised to inject $250 billion into banks in return for partial ownership. The original notion behind the bailout package was to help financial institutions lend money more freely again, one of the main reasons the economy is in danger of getting stuck in a long and painful recession.
Until Monday, all of AIG's bailout relief was coming from the Fed.
The Fed, earlier this year, said it would loan a total of $123 billion to AIG. The insurance company was later allowed to access another $20.9 billion through the Fed's "commercial paper" program. That's where the Fed is buying mounds of companies' short-term debt often used for crucial day-to-day expenses, such as payrolls and supplies.
Monday's restructuring, provides AIG with easier terms on the Fed loans. The new package reduces the interest rate AIG will pay and it will extend loan terms to five years from two years, reducing the need for AIG to sell off business lines and other assets at firesale prices in order to repay the government.
AIG reported Monday that continued financial market turmoil resulted in a large third-quarter loss.
The New York-based company said it lost $24.47 billion, or $9.05 per share, after a profit of $3.09 billion, or $1.19 per share, a year ago.
Results included pre-tax losses of $18.31 billion tied to the declining value of AIG's investment portfolio. They were also hurt by catastrophe losses and charges related to restructuring.
Excluding items, operating losses totaled $3.42 per share — missing analysts' average loss estimate of 90 cents per share, according to analysts.
In early October AIG said it would sell certain business units to pay off the $85 billion Fed loan. The company, however, said it plans to retain its U.S. property-and-casualty and foreign general insurance businesses. It also plans to keep an ownership interest in its foreign life-insurance operations.
AIG is a colossus on Wall Street and financial districts around the globe, with operations in more than 130 countries and $1 trillion in assets on its balance sheet.
Besides life, property and other insurance offerings, AIG provides asset-management services and airplane leases. Its myriad businesses are also linked to mutual funds, annuities and other retirement products held by millions of ordinary Americans.
But perhaps the biggest concern about AIG is the dizzying array of complex financial instruments it structured for commercial banks, investment banks and hedge funds around the globe — many of which were directly or indirectly linked to the value of U.S. mortgages.