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$30 billion more for ailing AIG

Company at the center of the financial crisis had already received $150 billion. Confidence in federal bailouts may be waning.

March 03, 2009|Jim Puzzanghera and Martin Zimmerman

WASHINGTON AND LOS ANGELES — The government gave ailing insurer American International Group Inc. $30 billion more in loans Monday, renewing doubts about the effectiveness of federal bailouts and triggering another avalanche on Wall Street that pushed the Dow index below 7,000 for the first time in a dozen years.

U.S. Treasury and Federal Reserve officials also eased conditions on terms from some of the three earlier attempts to prop up the giant company, which also reported a staggering quarterly loss of $61.7 billion on Monday.

The latest effort to bolster AIG and continued problems at other financial giants such as Bank of America Corp. and Citigroup Inc. -- along with a slew of gloomy economic forecasts recently -- had led many investors to question whether the government's efforts to rescue the financial system were working, analysts said.

"We've reached the point of disgust with Washington," said Peter Boockvar, equity strategist at New York brokerage house Miller Tabak & Co. "Every day there's a new plan, and every day there's a new bailout. I think bailout fatigue is gripping the market."

The Dow Jones index of 30 blue-chip stocks dropped nearly 300 points Monday to 6,763.29, the first time the widely watched gauge has fallen below 7,000 in nearly 12 years. In January and February, the Dow fell almost 20% -- the worst first two months of the year in its 113-year history.

The financial crisis has made it increasingly dangerous to let AIG fail because its tentacles continue to extend throughout the global financial system. Therefore, its implosion could set off a chain reaction of failures at banks and other institutions worldwide.

On Monday, stocks across Europe suffered their biggest losses since December in the wake of AIG's news, along with the refusal of West European nations to provide new financial support to the struggling East. Investors also took note of financier Warren Buffett's statement that the U.S. economy was in a "shambles."

The changes made to AIG's loan terms recognized a painful reality. Though the initial pact called for selling off pieces of the company to repay federal loans, the credit crisis has made it difficult for potential buyers to raise the cash necessary for purchases.

The government still considers AIG too big to fail. As a result, the White House decided that the $150-billion commitment already made -- the largest financial infusion to date -- was not too big to get bigger.

"The Treasury Department and others felt that the systemic risk of doing nothing was simply unacceptable," said White House Press Secretary Robert Gibbs, who did not rule out giving still more money to AIG. "We're focused on taking the steps necessary to restructure AIG so that it, in the long run . . . no longer poses the type of systemic threat that it poses right now."

Treasury and Fed officials added a $30-billion credit line, which the company can draw on as needed, to strengthen AIG's capital structure after the company posted its huge loss for the final three months of last year, a record for a publicly held U.S. company.

Analysts said that a potential failure of AIG still posed a major danger to the economy even as the company tries to scale down and become less intertwined with the financial system.

"I think there's a clear understanding in Washington that you can't back away," said Len Blum, managing director of Westwood Capital, a New York investment bank. Still, he said, "it could end up being a black hole. At some point the government's got to cut it off."

Even as it teeters, AIG retains a prodigious presence in finance. With operations in 130 countries, it has more than 30 million policyholders in the United States and 74 million worldwide. It insures the property of nearly every Fortune 500 company and is a leading source of retirement insurance for teachers and nonprofit groups, among others.

But more central to its problems, AIG provided about half a trillion dollars' worth of insurance to banks and other financial institutions through complex instruments called credit-default swaps. In essence, AIG insured riskier mortgage-backed securities and other investments that have helped fuel the broader economic meltdown.

"If AIG can't make its payments, its customers experience losses or defaults, and their customers do the same," said Russell Walker, a risk management expert at Northwestern University. "It's like a domino. Once it's started, you can't just stop it."

For that reason, the Fed, with the backing of the Treasury, lent AIG $85 billion in September to prevent an immediate collapse. The government received warrants for the right to buy 79.9% of AIG's stock.

Essentially in control of the company, federal officials replaced top management and directed AIG to start selling off its assets so that credit-default swaps wouldn't drag down its largely healthy insurance business and the company would not pose a grave risk to the global financial system.

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