American International Group's (AIG) board on Sunday night approved a major overhaul of the rescue plan it had received from the federal government in order to help the company function in a more stable financial environment, The Wall Street Journal reported, citing people familiar with the situation.
The U.S. will end up with total exposure of about $150 billion in investments, the Journal said, up from the recent total of $123 billion. That's an unprecedented level of investment in a private company, and could increase pressure to bail out other companies such as Big Three auto makers General Motors (GM), Ford Motor (F) or Chrysler, which are also struggling to survive.
The initial AIG deal of $85 billion had come under fire from all sides -- from lawmakers and citizens upset by what they saw as a bailout of a company that took on too much risk and didn't deserve the money, and by financial experts who said the plan would have required AIG to sell assets amid a falling market while paying high interest rates on its loans.
AIG didn't gain any new goodwill when reports came out about spa retreats , hunting vacations and the like that the company paid for, which took place even after the government bailout occurred. But the insurer cut more deals, giving it the recent $123 billion, and now this $150 billion total.
Elements of the new plan are expected, according to the Journal, to include: a rollback of the length and interest rate of the existing loan; a purchase of $40 billion of preferred shares in AIG through the Treasury's Troubled Asset Relief Program; cancellation of most of AIG's credit-default-swap agreements through a massive purchase of their underlying real estate assets; and a backstop of AIG's securities lending portfolio.
The $150 billion number is reached with the $40 billion stock investment, a $60 billion loan and $50 billion in capital to purchase distressed assets. The government's equity interest in AIG would stay at 79.9% following the changes, the Journal reported. Details of the agreement are expected to be released on today, the Journal said, when AIG is scheduled to release its third-quarter earnings report.
Under the new plan, the Journal said, AIG would transfer its troubled holdings into two separate entities that would be capitalized by the government.
One would acquire the underlying securities, which a face value of abut $70 billion, that AIG had agreed to insure with CDSs. AIG would try to buy the securities from the counterparties on the CDS contracts for about 50 cents on the dollar; the entity would be funded with $5 billion from AIG and $30 billion from the government.
The second entity, the Journal reported, would be set up to deal with liquidity problems in AIG's securities lending business, which has suffered while the credit markets have been frozen. The government will inject about $20 billion, and AIG will put in $1 billion. AIG would then, the Journal said, use the proceeds to shut down a $37.8 billion lending facility that it has not yet fully tapped.
These moves are being made in the hopes that AIG will be able to operate under more stable conditions, the Journal said, and won't have to worry about continued losses in those areas.
AIG still faces a challenging environment as it struggles to retain customers and regain its footing in a volatile market. It's still possible that the company could succeed, and the government could make back its entire investment with a profit, though the company has a long road ahead before that would happen.
AIG's stock rose 13% to $2.11 on Friday. It has fallen this year from the mid-$50s, and in mid-September was removed from the Dow Jones Industrial Average.
China announced on Sunday that it will enact a stimulus package estimated to be around 4 trillion yuan, or around US$580 billion, government media agency Xinhua reported.
The announcement shows that the country's leaders are concerned about the country's economic growth prospects.
Xinhua quoted China's State Council as saying, "With the deepening of the global financial crisis over the past two months, the government must take flexible and prudent macro-economic policies to deal with the complex and changing situation.
"They realize this is really about sentiment and confidence, which needs a very fast and strong policy response," Wang Qing, an economist with Morgan Stanley, told The Wall Street Journal.
The stimulus package will involve loosening credit conditions, cutting taxes and embarking on a major infrastructure spending program in a wide-ranging effort to offset adverse global economic conditions by boosting domestic demand, Xinhua said.
The money will be spent over the next two years to finance programs in 10 major areas, such as low-income housing, rural infrastructure, water, electricity, transportation, the environment, technological innovation and rebuilding from several disasters, most notably the May 12 earthquake, Xinhua reported.
In addition, China will reform its value-added tax assessments, which it estimated could cut industry costs by about 120 billion yuan. Also, Xinhua said, Commercial banks' credit ceilings will be abolished to channel more lending to priority projects, rural areas, smaller enterprises, technical innovation and industrial rationalization through mergers and acquisitions.
The announcement comes in advance of October economic data, which are expected to show further declines in growth, as the export-driven country feels the pinch of economic weakness from its trade partners such as the U.S. and European countries, as well as internal spending pullbacks by consumers.
Xinhua noted that the consumer-price index, a measure of inflation, is expected to drop further through the end of the year. It reached a 12-year high of 8.7% in February, and was already down to 4.6% in September.
"As long as we take the right measures in a resolute and timely way to grasp the chance and rise to the challenges, we will surely secure steady and relative fast economic growth," Xinhua quoted the State Council as saying.
MICHELLE
Wall Street Journal, Wire Reports
Posts
2 comments:
In a related story, a man who got drunk and drove his car into a utility pole has been given millions of dollars by the government so he can buy a new one.
LOL! Somehow, that wouldn't surprise me; that's about the way things seem to be headed in this country.
Post a Comment