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AIG Dips Into TARP

Fed, Treasury restructure bailout package

November 10, 2008

By MortgageDaily.com staff

The U.S. Treasury will spend $40 billion from the Troubled Asset Relief Program, while the New York Federal Reserve has established a $23 billion credit facility secured by residential mortgage-backed securities in a new plan to shore up struggling American International Group Inc.

AIG's bailout package has been restructured, the Federal Reserve Board said in a press release today.

The restructure was an attempt by the government "to keep the company strong and facilitate its ability to complete its restructuring process successfully," the statement said. In addition to resolving liquidity issues, the Fed said the moves will promote market stability, protect the U.S. government's investment and help AIG executive its planned sale of some businesses.

The steps were taken as AIG reported a massive $24 billion third-quarter loss. During the first nine months of 2008, losses have totaled $38 billion.

AIG has been stung by a major foray in to swaps, where it insured losses on hundreds of billions of dollars in mortgage-related securities.

The restructuring includes the Treasury's purchase of $40 billion in newly issued AIG preferred shares. Proceeds for the purchase will come from TARP and be used to pay down $40 billion of the Federal Reserve's secured lending facility.

"This purchase will allow the Federal Reserve to reduce from $85 billion to $60 billion the total amount available under the credit facility established by the Federal Reserve Bank of New York on Sept. 16," the announcement stated.

In addition, the interest rate on the existing credit facility with the New York Fed will be reduced from 850 basis points over the three-month LIBOR to just 300 BPS plus LIBOR. Meanwhile, the fee on undrawn funds will be reduced to 75 BPS from 850 BPS.

Another new facility established by the New York Fed will provide up to $23 billion for the purchase of RMBS from the New York-based company's U.S. securities lending collateral portfolio. The structure involves a newly formed limited liability company with a $1 billion subordinated loan from AIG. AIG will bear the risk of loss on the first $1 billion.

As part of the deal, AIG must implement new limitations on lobbying, restrict golden parachutes and freeze the size of the annual bonus pool for its top 70 executives. It also must keep a lid on corporate expenses.

"The U.S. government intends to exit its support of AIG over time in a disciplined manner consistent with maximizing the value of its investments and promoting financial stability," the Fed said.


Massive Bailout for AIG
The parent of United Guaranty and failed Wilmington Finance Inc. has received a bailout package from the U.S. government. Among the reasons cited in the extraordinary move by the government was concern over an increase in interest rates and a reduction in household wealth.

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