Do-over for AIG

The Federal Reserve Board and the Department of the Treasury today announced a new restructuring plan to help bolster AIG, including a $40 billion purchase of new preferred shares from the ailing insurer. Under the Troubled Asset Relief Program, the U.S. Treasury will buy the shares, trimming down New York-based American International Group Inc.’s available capital under its $85 billion credit facility to $60 billion. Additionally, the interest rate the insurer must pay on the loan from the government has been reduced to the three-month London interbank offered rate, plus 3%, down from three-month Libor plus 8.5%. AIG has been given more time to use the loan, with terms being extended to five years from two. The New York Federal Reserve Bank will also extend even more money to AIG, allowing the carrier to form two limited liability corporations to buy mortgage-backed securities. The bank will loan up to $22.5 billion to one LLC, funding its purchase of the securities from AIG’s U.S. securities-lending-collateral portfolio. AIG will make a $1 billion subordinated loan to this LLC and bear the risk for the first $1 billion of losses on the portfolio. Proceeds from this facility will allow AIG to repay its $37.8 billion loan from New York Fed, which was made on Oct. 8. The second LLC will borrow up to $30 billion from the bank to purchase collateralized debt obligations, which were covered by credit default swap contracts written by AIG Financial Products — the problematic unit that’s been cited as a major cause in the insurer’s downfall. AIG will loan $5 billion to the LLC, bearing the risk for the first $5 billion of losses on that portfolio of CDOs. The CDS counterparties will then unwind the swap transactions. Residual cash flows from both LLC transactions will be shared by the New York Fed and AIG.