NEW YORK, (Reuters) – The U.S. government will pour another $30 billion or so into American International Group Inc as the embattled insurer prepares to report the biggest loss in history and struggles to sell assets.
AIG’s board approved on Sunday a new rescue package that also includes more lenient terms on an existing government investment in its preferred shares and a lower interest rate on a government credit line, two sources familiar with the matter said.
This would be the third time the government has had to step up to save AIG, once the biggest insurer by market value whose global reach may have made it too big to fail.
The rejigged bailout is also the latest example of how federal regulators are having to revamp rescues for top financial institutions as the global financial crisis deepens.
Last week, the government agreed to boost its equity stake in Citigroup Inc to as much as 36 percent in a bid to bolster the bank, already the recipient of billions of dollars in taxpayer funds.
“The government really does not have the option of letting AIG totally blow up,” said Robert Haines, senior insurance analyst at CreditSights.
“Hopefully, the third bailout will be the charm,” he said. “The counterparties on most of the book are (European) banks that would be hammered if the U.S. walked away.”
Under the deal, the interest rate on AIG’s credit line from the government would be cut to match the three-month London Interbank Offered Rate (Libor), now about 1.26 percent, a source with direct knowledge of the matter said.
This would save AIG about $1 billion a year.
AIG now pays 3 percentage points above three-month Libor on the $60 billion credit line.
The additional equity commitment would give AIG the ability to issue preferred stock to the government later, the sources said.
AIG will also give the U.S. Federal Reserve ownership stakes in American Life Insurance (Alico), which generates more than half of its revenue from Japan, and Hong Kong-based life insurance group American International Assurance Co (AIA) in return for reducing its debt, they said.
AIG had been trying to sell Alico and part of AIA in a bid to raise money to pay back the government.
AIG may also securitize some U.S. life insurance policies and give them to the government to further reduce its debt, the source said.
The company may securitize up to $10 billion under that plan, one of the sources said.