Business

Federal lifeline to AIG now stands at $150 billion

WASHINGTON — It's a $150 billion gamble.

That's the size of the newly enlarged financial lifeline the U.S. government threw tottering insurance giant American International Group on Monday, expanding an aid package that's gradually grown since it began as an $85 billion loan in September.

The big question: Will the bailout be enough to stabilize the firm?

Here are some questions and answers about the rescue plan.

Question: Didn't AIG already get a bailout from the government?

Answer: Yes. Back on Sept. 16, the Federal Reserve initially provided AIG with an $85 billion loan, in return for a nearly 80 percent ownership stake. On Oct. 8, the Fed followed up with an additional $37.8 billion loan. Then, on Oct. 31, AIG was allowed to access $20.9 billion more.

Q: So, the original bailout plan didn't work?

A: Even with the original $85 billion lifeline, AIG continued to have problems as the country's overall financial and credit conditions worsened. The company was burning through cash and was saddled with risky mortgage-related securities that continued to fall in value.

AIG on Monday reported a massive third-quarter hit. It lost $24.47 billion, or $9.05 a share, after a profit of $3.09 billion, or $1.19 a share, a year ago. Revenue declined 97 percent to $898 million from $29.84 billion for the third quarter of 2007.

Q: What's different about the new bailout?

A: The new bailout is bigger — providing more than $150 billion to AIG, up from just a little more than $140 billion.

In a new twist, the Treasury Department is stepping in with $40 billion, coming from the $700 billion financial bailout package enacted last month. It marked the first time any of that bailout money has gone to any company other than a bank.

Monday's restructuring also provides AIG with easier terms on the original Fed loan.

The new package reduces the interest rate AIG will pay and will extend the loan term to five years from two.

In addition, the new arrangement replaced the second $37.8 billion Fed loan to AIG with a $52.5 billion aid package

The bailout should take stress off the company, giving it more breathing room and helping to prevent future losses, Fed officials said. The Fed contends it will not suffer losses because the market for such distressed investments has hopes of recovery as the economy and financial markets eventually rebound.

Q: Why is it important to keep AIG afloat?

A: AIG is a global colossus, with operations in more than 130 countries. It is so interconnected with other financial firms that its problems have a jolting ripple effect both in the United States and abroad.

  Comments