The US Federal Reserve announced on Wednesday that it would extend credit up to $37.8 billion to the American International Group, over the $85 billion loan it had given last month to help it deal with the continuing liquidity crisis (See: 85-billion bailout for AIG), bringing the total bailout money to $122.8 billion.
The New York Federal Reserve Bank will provide $37.8 billion in additional cash and as collateral, the bank will receive investment-grade fixed income securities from AIG enabling it to access funds based on its liquidity needs to repay its securities lending transactions.
The Fed said that the extended credit "will allow AIG to replenish liquidity used in settling those transactions, while providing enhanced credit protection to the New York Fed and US taxpayers in the form of a security interest in these securities."
The money will be used to resolve its existing securities lending transactions where companies that borrowed stock from AIG, presumably to sell short, are giving the stock back to it and demanding the return of cash or collateral.
Since AIG does not have the money to repay as the cash from the borrowed stock was invested in various securities that have gone down in value, this additional infusion will settle the borrowed securities transaction.
AIG was given an $85 billion loan by the Federal Reserve Board last month through which the US government got a 79.9-per cent equity stake in the insurer in the form of warrants called "equity participation notes". The loan was secured by AIG's assets, including its profitable insurance businesses.
At the start of this month, AIG had already drawn down $61 billion of its original $85 billion emergency bridge loan of which approximately $54 billion had gone toward its securities lending and AIG's financial products operation by early October (See: AIG to refocus on property, casualty)
As part of the deal, treasury secretary Henry Paulson replaced AIG's chief executive, Robert Willumstad with Edward Liddy, the former head of Allstate Corp.
The two problematic areas for AIG is its securities-lending business and Financial Products business which wrote hundreds of billions of dollars in credit default swaps which later on forced the company to post a huge amount of collateral it didn't have when it was downgraded by the credit rating agencies.
The additional lifeline comes a day after the House Oversight and Government Reform Committee to its horror learnt that its top executives went for a week long retreat to one of the most exclusive resorts in California running a tab of $442,000 just four days after the government bailed AIG with an $85 billion loan.
Joe Norton, AIG's director of public relations, said in an interview that the event had been scheduled last year to reward the independent insurance agents.
The company has announced a sweeping programme of asset sales that would reduce its revenues by almost half by holding talks with potential bidders for its Asian operations and its aircraft leasing business.