AIG's Liddy Says $122.8 Billion U.S. Loan `May Not Be Enough'
By Hugh Son
Oct. 23 (Bloomberg) -- American International Group Inc., the insurer bailed out by the U.S., may need to borrow more than the $122.8 billion already offered by the government if capital markets don't improve, said Chief Executive Officer Edward Liddy.
AIG, which averted collapse last month with a Federal Reserve loan, is dependent on ``what happens to the capital markets,'' Liddy, 62, said late yesterday on PBS's ``The NewsHour With Jim Lehrer.'' AIG needed cash after credit downgrades forced the insurer to post more than $10 billion in collateral to clients who purchased guarantees on bonds that lost value.
``To the extent they continue to go down and we have to keep posting collateral, as it's called in the vernacular of the industry, it's possible it may not be enough,'' Liddy said.
Liddy, the former Allstate Corp. CEO appointed by the government to run AIG last month, is selling businesses including U.S. life insurance, plane leasing and consumer finance to repay the loan. The New York-based company had tapped $82.9 billion, two-thirds of its total Fed credit line, as of last week and new figures may be disclosed today.
``This emphasizes the uncertainty for anyone trying to put a number'' on AIG's cash needs, said Bill Bergman, an analyst at Morningstar Inc. in Chicago. The financial products unit responsible for most of the firm's losses ``is a big black hole.''
Liddy said in the interview that U.S. Treasury efforts to spur lending and increase confidence in banks ``seem to be working'' and he thinks AIG ``should be OK.'' A spokesman for the New York Fed declined to comment.
`Liquidity Drain'
``The money is to meet our cash needs while we work out the rest of our solution, it's not the total solution,'' said AIG spokesman Nicholas Ashooh. ``We still have to sell businesses and still need a permanent solution to the liquidity drain'' from securities lending and the fixed-income guarantees known as credit-default swaps.
AIG, which got an $85 billion credit line on Sept. 16 to stave off bankruptcy, was given access to an additional $37.8 billion on Oct. 8 to shore up its securities-lending program, which lost money on investments made using collateral from assets it loaned to third parties. AIG agreed to turn over an 80 percent stake in the firm to the U.S. in exchange for the first loan.
The insurer may seek a third source of cash by tapping a Fed program that buys commercial paper, a person familiar with the matter said last week. AIG will probably borrow less than $10 billion through the program, which is scheduled to start next week, the person said.
AIG sold protection on $441 billion of fixed-income investments, including $57.8 billion in securities tied to subprime mortgages. The swaps plunged in value as the assets they guaranteed declined, forcing $25 billion in writedowns over nine months and leading to three quarterly losses.
Lessons Learned
Liddy told employees on Sept. 18 that the original $85 billion loan was ``a really big number, I think that's enough.'' In an Oct. 3 conference call with analysts, he said that he didn't want to state the company would ``never'' need more.
``One of the lessons from the savings and loan crisis is that firms that were going under forestalled the recognition of how severe the problem was through accounting, and with the cooperation of regulators,'' Bergman said. ``I certainly hope that's not happening with AIG today.''
AIG's losses have led to the ousters of two CEOs, Martin Sullivan and Robert Willumstad, in the last five months. The executives were lambasted by lawmakers at an Oct. 7 hearing on why the government needed to intervene to save AIG.
The insurer agreed to freeze $19 million due to Sullivan and $600 million in compensation for other executives, New York Attorney General Andrew Cuomo said yesterday. Cuomo last week demanded that AIG, once the world's biggest insurer, stop ``extravagant'' expenditures and recover millions of dollars in unreasonable payments, or face legal action.
Bad Trip
AIG also agreed last week to immediately cancel all junkets and perks, according to a statement jointly issued by Cuomo and the company. The company has been castigated by officials since it hosted a $440,000 conference at a California resort last month after agreeing to the federal bailout.
The insurer will pay 8.5 percent annual interest plus the 3- month London interbank offered rate on money it draws from the two-year, $85 billion loan. Three-month Libor is 3.54 percent today, compared with 2.88 percent the day AIG agreed to the bailout.
AIG later said it would also be allowed to swap as much as $37.8 billion of its ``investment-grade, fixed income securities'' with the government for cash to address a liquidity squeeze caused by the insurer's securities-lending program.
To contact the reporter on this story: Hugh Son in New York at [email protected]
Last Updated: October 23, 2008 13:39 EDT
By Hugh Son
Oct. 23 (Bloomberg) -- American International Group Inc., the insurer bailed out by the U.S., may need to borrow more than the $122.8 billion already offered by the government if capital markets don't improve, said Chief Executive Officer Edward Liddy.
AIG, which averted collapse last month with a Federal Reserve loan, is dependent on ``what happens to the capital markets,'' Liddy, 62, said late yesterday on PBS's ``The NewsHour With Jim Lehrer.'' AIG needed cash after credit downgrades forced the insurer to post more than $10 billion in collateral to clients who purchased guarantees on bonds that lost value.
``To the extent they continue to go down and we have to keep posting collateral, as it's called in the vernacular of the industry, it's possible it may not be enough,'' Liddy said.
Liddy, the former Allstate Corp. CEO appointed by the government to run AIG last month, is selling businesses including U.S. life insurance, plane leasing and consumer finance to repay the loan. The New York-based company had tapped $82.9 billion, two-thirds of its total Fed credit line, as of last week and new figures may be disclosed today.
``This emphasizes the uncertainty for anyone trying to put a number'' on AIG's cash needs, said Bill Bergman, an analyst at Morningstar Inc. in Chicago. The financial products unit responsible for most of the firm's losses ``is a big black hole.''
Liddy said in the interview that U.S. Treasury efforts to spur lending and increase confidence in banks ``seem to be working'' and he thinks AIG ``should be OK.'' A spokesman for the New York Fed declined to comment.
`Liquidity Drain'
``The money is to meet our cash needs while we work out the rest of our solution, it's not the total solution,'' said AIG spokesman Nicholas Ashooh. ``We still have to sell businesses and still need a permanent solution to the liquidity drain'' from securities lending and the fixed-income guarantees known as credit-default swaps.
AIG, which got an $85 billion credit line on Sept. 16 to stave off bankruptcy, was given access to an additional $37.8 billion on Oct. 8 to shore up its securities-lending program, which lost money on investments made using collateral from assets it loaned to third parties. AIG agreed to turn over an 80 percent stake in the firm to the U.S. in exchange for the first loan.
The insurer may seek a third source of cash by tapping a Fed program that buys commercial paper, a person familiar with the matter said last week. AIG will probably borrow less than $10 billion through the program, which is scheduled to start next week, the person said.
AIG sold protection on $441 billion of fixed-income investments, including $57.8 billion in securities tied to subprime mortgages. The swaps plunged in value as the assets they guaranteed declined, forcing $25 billion in writedowns over nine months and leading to three quarterly losses.
Lessons Learned
Liddy told employees on Sept. 18 that the original $85 billion loan was ``a really big number, I think that's enough.'' In an Oct. 3 conference call with analysts, he said that he didn't want to state the company would ``never'' need more.
``One of the lessons from the savings and loan crisis is that firms that were going under forestalled the recognition of how severe the problem was through accounting, and with the cooperation of regulators,'' Bergman said. ``I certainly hope that's not happening with AIG today.''
AIG's losses have led to the ousters of two CEOs, Martin Sullivan and Robert Willumstad, in the last five months. The executives were lambasted by lawmakers at an Oct. 7 hearing on why the government needed to intervene to save AIG.
The insurer agreed to freeze $19 million due to Sullivan and $600 million in compensation for other executives, New York Attorney General Andrew Cuomo said yesterday. Cuomo last week demanded that AIG, once the world's biggest insurer, stop ``extravagant'' expenditures and recover millions of dollars in unreasonable payments, or face legal action.
Bad Trip
AIG also agreed last week to immediately cancel all junkets and perks, according to a statement jointly issued by Cuomo and the company. The company has been castigated by officials since it hosted a $440,000 conference at a California resort last month after agreeing to the federal bailout.
The insurer will pay 8.5 percent annual interest plus the 3- month London interbank offered rate on money it draws from the two-year, $85 billion loan. Three-month Libor is 3.54 percent today, compared with 2.88 percent the day AIG agreed to the bailout.
AIG later said it would also be allowed to swap as much as $37.8 billion of its ``investment-grade, fixed income securities'' with the government for cash to address a liquidity squeeze caused by the insurer's securities-lending program.
To contact the reporter on this story: Hugh Son in New York at [email protected]
Last Updated: October 23, 2008 13:39 EDT
