AIG Repays Portion of $85 billion Taxpayer-Backed Federal Loan

Nov. 7, 2008 – American International Group (AIG) officials this week reduced by $2.3 billion the amount the company owes United States taxpayers through the government-funded bailout loan approved Sept. 16.

AIG officials used the Federal Reserve’s recently created commercial paper funding program to swap its high-interest debt for more favorable terms of the commercial paper program. The initial $85 billion taxpayer loan was to be repaid within two years at an interest rate of up to 14 percent. The commercial paper program charges an interest rate of less than 3 percent.

AIG officials paid down a portion of the federal loan despite reports that federal officials might lower the interest rate charged and extend repayment terms on the initial $85 billion loan. The Wall Street Journal today reported federal officials were considering a possible change in the terms of the loan.

News of federal officials possibly reworking the terms of the initial $85 billion loan comes after former AIG chief executive officer Maurice “Hank” Greenberg and others urged company officials to rework terms of the federal loan or face certain bankruptcy. AIG official said they would sell company assets to pay off the $85 billion loan while retaining its profitable United States-based property and casualty and foreign general insurance businesses. AIG also plans to keep an ownership interest in its foreign life-insurance operations.

But tightened credit markets and decreased asset values have slowed AIG asset sales, putting additional pressure on company officials to obtain more favorable loan terms.

The Federal Reserve on Nov. 6 released information showing the government has loaned AIG $81.2 billion under two emergency loans to help the company avoid filing for bankruptcy protection. That figure was $83.5 billion a week ago and had been reduced through the federal commercial paper program.

Federal Reserve officials loaned AIG up to $85 billion loan at an interest rate of up to 14 percent in return for a 79.9 percent stake in AIG and the power to change corporate management. The Federal Reserve boosted the available loan amount by an additional $37.8 billion on Oct. 8.

AIG officials last week said they would be able to access up to another $20.9 billion under the federal government’s new commercial paper funding program, raising AIG’s total potential debt to the United States government at $144 billion. AIG officials used the commercial-paper program to reduce the amount it had borrowed under the original $85 billion line of credit. As of Nov. 5, AIG’s borrowings under the $85 billion federal credit facility totaled $61 billion, down from about $65.5 billion a week ago. AIG paid down some $9.1 billion over during the past two weeks.

While AIG officials have decreased one loan amount, they boosted their total debt under the $37.8 billion lending agreement to $19.9 billion – up $2.2 billion from last week. Federal officials said the decrease in the $85 billion facility is due AIG’s participation in the commercial paper program.