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US Govt gives $30bn more aid to troubled insurer AIG

The US government unveiled a fresh aid plan of $30 billion for AIG to stave off collapse of the ailing insurance company as it revealed massive new losses.

business Updated: Mar 02, 2009 20:56 IST

The US government on Monday unveiled a fresh aid plan of 30 billion dollars for AIG to stave off collapse of the ailing insurance company as it revealed massive new losses.

American International Group (AIG) announced a fourth quarter loss of 61.7 billion dollars, pushing up its net loss for 2008 to $99.3 billion.

The government, which had already pumped some $150 billion into AIG, said the new aid package sought to avert a potentially catastrophic collapse of what had been the world's biggest insurer.

"Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high," The US Treasury and Federal Reserve said in a statement unveiling the new bailout.

"The additional resources will help stabilize the company, and in doing so help to stabilize the financial system."

In addition to the extra $30 billion, the bailout restructures the existing aid to AIG by converting the preferred shares issued to the government.

It provides the US government a 77.9 per cent stake in the company and reduces the financial burden on AIG from the dividend payments on its preferred shares.

AIG's 60-billion-dollar revolving credit facility will be reduced in exchange for stakes in American Life Insurance Company (ALICO) and American International Assurance Company Ltd. (AIA), two life insurance subsidiaries for which AIG has been unable to find a buyer.

The Treasury statement noted that "public ownership of financial institutions is not a policy goal and, to the extent public ownership is an outcome of Treasury actions, as it has been with AIG, it will work to replace government resources with those from the private sector to create a more focused, restructured and viable economic entity as rapidly as possible."

The bailout highlighted the ongoing turmoil in financial markets that has roiled AIG, which suffered massive losses in guaranteeing mortgage securities hammered by the meltdown in the real estate market.

"AIG's results in the fourth quarter were negatively affected by continued severe credit market deterioration," the company said in a statement.

AIG continues to face "significant challenges, driven by the rapid deterioration in certain financial markets in the last two months of the year and continued turbulence in the markets generally," it added.

But chairman and chief executive Edward Liddy said AIG "is executing one of the most extensive corporate restructuring programs in history at a time when the global economy and capital markets are in turmoil."

"While we have made meaningful progress, we have concluded, along with Treasury and the Federal Reserve, that additional tools are needed to enable success," he added.

"The measures announced today provide the necessary US government support for a plan to establish separate capital structures, including outside ownership, for certain AIG companies."

The original Federal Reserve rescue of 85 billion dollars in mid-September, at the time the largest in corporate history, was expanded by 37.8 billion dollars just a few weeks later and entailed government acquisition of a 79.9 percent stake in the troubled insurer.

Fitch Ratings said the new actions are positive because they "enhance the company's liquidity and reduce the company's annual preferred dividend requirements and financial leverage."

The US government "has significant incentives to assure AIG is successful in implementing its restructuring plan," it said

But Fitch added that "there is a high potential for future losses from various exposures" at AIG.