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NEW YORK, Dec 19 — Even as the biggest banks repay their government debt in what is being heralded as a successful rescue programme, four troubled giants of the financial world remain on US government life support.
These companies, the American International Group (AIG), Fannie Mae, Freddie Mac and GMAC, are not only unable to repay the government, but are also in need of continued infusions that make them look increasingly like long-term wards of the state.
And the total risk they pose to the taxpayer far exceeds that of the big banks. Fannie and Freddie, in the final days of the year, are even said to be negotiating with the Treasury about greatly expanding the amount of money available to them.
Though the four are not in all the same business, they were caught in one of the same traps: They sold mortgage guarantees — in some cases to each other. Now, when homeowners default, as they are doing in record numbers, these companies are covering the losses.
Essentially, taxpayer money to these companies is being used partly to protect banks and other investors who own the mortgages.
Like the big banks, these four companies would no doubt prefer to be free of government assistance, which comes with pay and other restrictions on their executives. But they appear at risk of getting onto a debt merry-go-round, where they have to draw new money from the government just to keep up with their existing government debts.
Fannie Mae warned recently, for example, that it could not pay the dividends it owes the Treasury, so ‘future dividend payments will be effectively funded with equity drawn from the Treasury’.
All the companies have recently drawn fresh money from the government or are in talks to do so:
Fannie Mae and Freddie Mac, which buy and resell mortgages, have used up US$112 billion (RM381 billion) - including US$15 billion for Fannie last month - out of a total US$400 billion pledged by the Treasury.
Now, according to people close to the talks, officials are discussing the possibility of increasing that commitment, possibly to US$400 billion for each company, by year-end, after which the Treasury would need congressional approval to extend it.
Company and government officials declined to comment.
GMAC, which finances vehicle sales, already has US$13.4 billion from the Troubled Asset Relief Programme (Tarp), and has been in talks with the Treasury about getting up to US$5.6 billion more, as a government ‘stress test’ showed it was still too weak.
AIG, the insurance conglomerate, recently drew US$2 billion from a special US$30 billion government facility that was created in the spring after a US$40 billion infusion proved insufficient.
Those capital commitments from the Treasury do not capture the full scale of government assistance to the companies. The government has also bought mortgage-backed securities and guaranteed corporate bonds, while the Federal Reserve Bank of New York has made an emergency loan.
US Treasury Secretary Timothy Geithner welcomed the repayment plans by Citigroup and Wells Fargo this week, saying the actions by the biggest banks meant taxpayers were now on track to reduce Tarp bank investments by more than 75 per cent. It means that of the US$245 billion awarded to banks, more than US$185 billion has either been recovered or about to be.
But that is just a fraction of the money the four troubled debtors have received or may still get. Together, they have been offered nearly US$600 billion, and that lifeline could climb to nearly US$1 trillion if the commitment to Fannie and Freddie is doubled, as some predict.
What is more, the companies seem short on persuasive strategies for extricating themselves from the government’s embrace.
A spokesman for GMAC pointed out that the company has made all its scheduled dividend payments to the Treasury, as has Freddie Mac.
While Fannie Mae has said it will have trouble paying its dividends, AIG does not have to pay dividends.
A spokesman for AIG said the insurance company is committed to repaying taxpayers, but repayment will depend on market conditions.
A Freddie Mac spokesman said the company is dependent on continued support from the Treasury to stay solvent.
AIG’s latest request for money offers an example of why it needs more government aid to pay its debts. The company has a big aircraft leasing unit, International Lease Finance Corp, which is considered a valuable asset, but not a core part of its business.
Ever since the company announced last year that it would dismantle itself and sell subsidiaries to pay back the government, analysts have expected International Lease to be sold.
But there is a big catch. AIG does not own International Lease outright. A big block of the unit’s stock is actually held by an insurance subsidiary, which uses the shares to secure its promises to pay claims. If AIG sold International Lease and gave the proceeds to the Fed to pay down debt, it would strip too much money out of the insurer, making it insolvent.
So AIG used part of the US$2 billion that it recently received from the Treasury to buy back the International Lease shares. That way, when a buyer finally appears, AIG can sell the leasing business and pay the Fed.
“The irony is, for the government to recoup its value, it has to keep its support behind AIG,” said a former company executive who requested anonymity because of the delicacy of the matter. “The thing is a total Catch-22.”
AIG said it also recently used some money from the Treasury to restructure its mortgage-guarantee business - something GMAC, Fannie and Freddie are struggling to do as well.
All four of the companies had businesses that provided mortgage guarantees. When defaults began soaring in 2007, they all suffered big losses. In some cases, they have insured each other; in other cases, banks or investors have to be paid. — New Choke Times:oIo:
These companies, the American International Group (AIG), Fannie Mae, Freddie Mac and GMAC, are not only unable to repay the government, but are also in need of continued infusions that make them look increasingly like long-term wards of the state.
And the total risk they pose to the taxpayer far exceeds that of the big banks. Fannie and Freddie, in the final days of the year, are even said to be negotiating with the Treasury about greatly expanding the amount of money available to them.
Though the four are not in all the same business, they were caught in one of the same traps: They sold mortgage guarantees — in some cases to each other. Now, when homeowners default, as they are doing in record numbers, these companies are covering the losses.
Essentially, taxpayer money to these companies is being used partly to protect banks and other investors who own the mortgages.
Like the big banks, these four companies would no doubt prefer to be free of government assistance, which comes with pay and other restrictions on their executives. But they appear at risk of getting onto a debt merry-go-round, where they have to draw new money from the government just to keep up with their existing government debts.
Fannie Mae warned recently, for example, that it could not pay the dividends it owes the Treasury, so ‘future dividend payments will be effectively funded with equity drawn from the Treasury’.
All the companies have recently drawn fresh money from the government or are in talks to do so:
Fannie Mae and Freddie Mac, which buy and resell mortgages, have used up US$112 billion (RM381 billion) - including US$15 billion for Fannie last month - out of a total US$400 billion pledged by the Treasury.
Now, according to people close to the talks, officials are discussing the possibility of increasing that commitment, possibly to US$400 billion for each company, by year-end, after which the Treasury would need congressional approval to extend it.
Company and government officials declined to comment.
GMAC, which finances vehicle sales, already has US$13.4 billion from the Troubled Asset Relief Programme (Tarp), and has been in talks with the Treasury about getting up to US$5.6 billion more, as a government ‘stress test’ showed it was still too weak.
AIG, the insurance conglomerate, recently drew US$2 billion from a special US$30 billion government facility that was created in the spring after a US$40 billion infusion proved insufficient.
Those capital commitments from the Treasury do not capture the full scale of government assistance to the companies. The government has also bought mortgage-backed securities and guaranteed corporate bonds, while the Federal Reserve Bank of New York has made an emergency loan.
US Treasury Secretary Timothy Geithner welcomed the repayment plans by Citigroup and Wells Fargo this week, saying the actions by the biggest banks meant taxpayers were now on track to reduce Tarp bank investments by more than 75 per cent. It means that of the US$245 billion awarded to banks, more than US$185 billion has either been recovered or about to be.
But that is just a fraction of the money the four troubled debtors have received or may still get. Together, they have been offered nearly US$600 billion, and that lifeline could climb to nearly US$1 trillion if the commitment to Fannie and Freddie is doubled, as some predict.
What is more, the companies seem short on persuasive strategies for extricating themselves from the government’s embrace.
A spokesman for GMAC pointed out that the company has made all its scheduled dividend payments to the Treasury, as has Freddie Mac.
While Fannie Mae has said it will have trouble paying its dividends, AIG does not have to pay dividends.
A spokesman for AIG said the insurance company is committed to repaying taxpayers, but repayment will depend on market conditions.
A Freddie Mac spokesman said the company is dependent on continued support from the Treasury to stay solvent.
AIG’s latest request for money offers an example of why it needs more government aid to pay its debts. The company has a big aircraft leasing unit, International Lease Finance Corp, which is considered a valuable asset, but not a core part of its business.
Ever since the company announced last year that it would dismantle itself and sell subsidiaries to pay back the government, analysts have expected International Lease to be sold.
But there is a big catch. AIG does not own International Lease outright. A big block of the unit’s stock is actually held by an insurance subsidiary, which uses the shares to secure its promises to pay claims. If AIG sold International Lease and gave the proceeds to the Fed to pay down debt, it would strip too much money out of the insurer, making it insolvent.
So AIG used part of the US$2 billion that it recently received from the Treasury to buy back the International Lease shares. That way, when a buyer finally appears, AIG can sell the leasing business and pay the Fed.
“The irony is, for the government to recoup its value, it has to keep its support behind AIG,” said a former company executive who requested anonymity because of the delicacy of the matter. “The thing is a total Catch-22.”
AIG said it also recently used some money from the Treasury to restructure its mortgage-guarantee business - something GMAC, Fannie and Freddie are struggling to do as well.
All four of the companies had businesses that provided mortgage guarantees. When defaults began soaring in 2007, they all suffered big losses. In some cases, they have insured each other; in other cases, banks or investors have to be paid. — New Choke Times:oIo:
