Federal Government Might Back Loans to Sell AIG Units

Nov. 19, 2008 – Having already extended up to $150 billion in taxpayer-funded loans to troubled insurer American International Group (AIG), federal officials soon might find themselves in the prickly situation of having to provide loans to potential buyers of AIG assets so the insurance company can repay its debt to United States taxpayers.

Many AIG assets are worth billions of dollars, but credit markets are tight and stock prices falling, making it difficult for potential buyers to raise or borrow enough cash to purchase AIG assets. But having accepted an 80 percent stake in AIG as collateral on its initial taxpayer-backed loan to the company, the federal government might have to extend low-interest loans to interested buyers whose credit worthiness makes them better bets than AIG to repay their debts.

Federal officials have said they don’t want to finance AIG asset sales and recently revised loan terms to make it easier for AIG to repay its taxpayer-funded debt, but federal officials might not have a choice if they want to expedite company asset sales under current market conditions.

AIG officials have said they plan to sell all company assets and retain its profitable U.S. property and casualty, foreign general insurance and an ownership interest in foreign life insurance companies. If recently tightened credit markets don’t open up soon, AIG officials will have a hard time finding suitors with enough available funding to buy off assets, such as the company’s U.S. life insurance units. Industry analysts estimate AIG’s United States-based life insurance subsidiary could be worth up to $33.8 billion.

Any federal financing to companies buying AIG assets would leave the federal government exposed to AIG at the very time federal officials are working to sever government ties to the struggling insurance giant. But industry analysts say potential buyers likely are searching for financing from sources other than the federal government with few promising results.

Formerly the world’s largest insurance company, AIG became the world’s most indebted insurer after federal officials in September agreed to extend the company an $85 billion loan in exchange for an 80 percent share of company stocks. Federal officials said allowing AIG to go bankrupt would have a devastating impact on U.S. and international financial markets and recently revised lending terms, making it a $150 billion loan with a lower interest rate and longer repayment period.