The US government dramatically boosted its bailout of insurer American International Group Inc. and eased the terms of its loans to the company on Monday after an initial rescue plan failed to stabilize the company. Under the new plan, the US Treasury will take a $40 billion equity stake in AIG as part of a package of credits to prevent the collapse of what it called a “systemically important company.” The Federal Reserve is providing up to $112.5 billion in loans and funds for asset purchases. The new package, the largest bailout of a single company, provides AIG with about $27 billion more than previously extended and will leave the government exposed to billions of dollars of additional potential losses. “This is a one-off, created solely for AIG,” a US Treasury official said of the transaction hammered out over the weekend. “This wasn't done to help AIG shareholders. It gives the company the room it needs in its capital structure to execute its asset disposition plan,” the official told reporters in a background briefing. AIG shares rose 29 percent to $2.72 in early trade after the new rescue plan was disclosed. The restructured bailout was announced as AIG posted a $24.47 billion third-quarter loss, the largest in the company's 89-year history. In addition to massive losses on investments, there were billions of dollars of insurance claims from hurricanes that battered the US Gulf Coast this year. The US Treasury will buy $40 billion of AIG preferred shares with money from its $700 billion financial rescue fund, the Troubled Asset Relief Program (TARP), a tool that did not exist at the time of AIG's initial bailout in mid-September. This will allow AIG to pay down its loan from the Federal Reserve to $60 billion from $85 billion. The Fed also will provide more than $50 billion to buy distressed securities and backstop the firm's lending portfolio. The new plan is nearly double the government's initial $85 billion rescue of AIG, forged on Sept. 16, weeks before the Treasury launched its plan to inject capital directly into American financial institutions. The government said its equity stake in the insurer would still be about 80 percent, making it the biggest beneficiary of the revised bailout. The preferred shares will carry a dividend of about 10 percent. The Fed will slash the interest rate on its remaining loan by 5.5 percentage points to three percentage points above three-month LIBOR. AIG will only pay 0.75 percent interest on undrawn funds from the facility, which is extended to five years from two years. The AIG capital injection will reduce to just $40 billion the amount of bailout funds that the Treasury could now to dole out to non-bank companies before it must ask Congress for a second $350 billion. Struggling automakers General Motors Corp., Ford Motor Co and Chrysler LLC have requested tens of billions of dollars in Treasury aid. The Treasury has separately committed $250 billion for banks and thrifts, but officials are studying other uses for the remaining funds.
