Friday, October 31, 2008


Fed Adds $21 Billion To Loans For AIG

The American International Group said Thursday that it had been given access to the Federal Reserve's new commercial paper program, allowing it to reduce its reliance on a costlier emergency loan from the Fed. The company said it would be able to borrow up to $20.9 billion under the new program, raising its maximum available credit from the Fed to $144 billion under three different programs. The credit includes an earlier emergency loan of $85 billion from the Fed that carries a much higher interest rate.

A.I.G.'s big borrowings underscore the company's bewilderingly rapid decline. When it suddenly faced a cash crisis in mid-September, the original estimate of the amount it needed was just $20 billion. A few days later, the Fed stepped forward with its $85 billion credit line. And now, the stunning size of that original bailout has grown by almost 70 percent.

A.I.G.'s cash needs could grow even further. Much of the cash it needs is being used to meet collateral calls from its derivatives counterparties, and the precise collateral triggers and amounts are not public information. In general, the derivative contracts cost A.I.G. more as the real estate markets decline. The company's financial products division did a lot of business in that type of derivative, called credit-default swaps.

By the same token, if real estate prices rebounded, A.I.G. has said, it could call some of the collateral back. In addition to the $85 billion credit line and the $20.9 billion commercial paper program, A.I.G. has a $38 billion facility from the Fed that provides liquidity for the company's securities-lending business. A.I.G. said on Thursday that it was currently using about $18 billion of this facility.

By tapping the newest source of money from the Fed, A.I.G. was able to reduce the amount it had borrowed under the original $85 billion line of credit, said a spokesman, Joe Norton. He said the company had currently drawn down $65.5 billion from that loan, compared with about $72 billion a week ago.

The Fed extended the original $85 billion line of credit at a steep price. On the part of the loan that A.I.G. draws down, it must pay an interest rate of 8.5 percentage points over the three-month Libor, an index rate for inter-bank lending. On the unused portion, A.I.G. must pay a fixed rate of 8.5 percent. In addition, the Fed added a 2 percent commitment fee to the total balance when it started the loan.

Mr. Norton said A.I.G. had incurred interest and fees of about $331 million so far. The Fed also took a majority stake in A.I.G. in exchange for the bailout, angering shareholders, who were almost completely wiped out. The commercial paper program is much cheaper. The interest rate changes every day, but in the four days since the Fed started the program, the highest rate was just 3.89 percent. A.I.G. is not the only participant. The Fed offered the program to all issuers of commercial paper in the nation to restart the stalled credit markets.

Mr. Norton said A.I.G. would use the newest source of funds for working capital, to refinance existing commercial paper, and to make voluntary prepayments on the $85 billion loan. He said that such voluntary prepayments would not reduce the total amount of the credit line available. If, by contrast, A.I.G. sold business assets and used the proceeds to pay down the loan, Mr. Norton said, the $85 billion balance would be reduced accordingly.

Some Banks May Tell U.S. To Keep Bailout Cash

The American Bankers Association complained on Thursday that bankers around the country were "extremely upset" about how the Treasury Department was trying to offer them billions of dollars in fresh capital.

"These bankers believe they are being asked - in some cases pressured - to participate in a program they did not want and do not need," wrote Edward L. Yingling, president of the American Bankers Association, in a blistering letter to the Treasury secretary, Henry M. Paulson Jr.

Saying he had "deep concerns with the lack of clarity about the program," Mr. Yingling said the confusion had grown sharply this week over what the government's purpose was. The bank lobbying group said the main confusion was over whether the purpose of the program was to shore up healthy banks, as Mr. Paulson has insisted, or to rescue failing ones.

Mr. Yingling said he was alarmed that lawmakers in Congress were criticizing the Bush administration for its reluctance to impose tougher restrictions on banks that accept government money. Some Democratic lawmakers have complained that banks are taking taxpayer money with one hand while paying out dividends to shareholders with the other. Some policy makers have also complained that banks are not lending enough and might be paying their executives too much.

Since the Treasury Department introduced its plan, officials have stressed that their goal was to strengthen healthy banks and get them to revive their lending. Officials are also encouraging the takeovers of sick banks by healthy ones, as they did last week when the Treasury approved the bailout program's purchase of $7.7 billion of preferred shares in PNC Financial Services and rejected an application from National City Bank, based in Cleveland. National City quickly agreed to a takeover by PNC.

But the focus on healthy banks has created baffling contradictions. Healthy banks have been reluctant to take the government money, in part because they feared being stigmatized as needy or vulnerable. Mr. Paulson essentially strong-armed several of the country's biggest banks into participating when he announced the program earlier this month.

To attract healthy banks into the program, Treasury officials also imposed as few restrictions as possible for those that received money. Banks could still keep paying dividends. They had only limited restrictions on executive bonuses and compensation. And the government would not force the banks to make loans they did not want to make.

But that only raised the question: why was the government trying to give those banks money in the first place?

Andrew M. Cuomo, the New York attorney general, sent letters to the nine biggest financial institutions on Wednesday, demanding a "detailed accounting" of the next round of bonuses they planned to pay.

Mr. Yingling said many healthy banks might want to take advantage of the Treasury's offer, but not if they had to suspend dividends or accept restrictions on executive pay.

"It would make no sense for a well-capitalized bank with solid earnings to agree to a program which would greatly lower the value of its stock," Mr. Yingling wrote.


Wall Street Journal, Bloomberg, WSB

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