Sunday, November 2, 2008

Fed Adds $21 Billion to Loans for A.I.G.

Fed Adds $21 Billion to Loans for A.I.G.

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The American International Group said Thursday that it had been given access to the Federal Reserve’s new commercial paper program, allowing it to reduce its reliance on a costlier emergency loan from the Fed.

The company said it would be able to borrow up to $20.9 billion under the new program, raising its maximum available credit from the Fed to $144 billion under three different programs. The credit includes an earlier emergency loan of $85 billion from the Fed that carries a much higher interest rate.

A.I.G.’s big borrowings underscore the company’s bewilderingly rapid decline. When it suddenly faced a cash crisis in mid-September, the original estimate of the amount it needed was just $20 billion. A few days later, the Fed stepped forward with its $85 billion credit line. And now, the stunning size of that original bailout has grown by almost 70 percent.

A.I.G.’s cash needs could grow even further. Much of the cash it needs is being used to meet collateral calls from its derivatives counterparties, and the precise collateral triggers and amounts are not public information. In general, the derivative contracts cost A.I.G. more as the real estate markets decline. The company’s financial products division did a lot of business in that type of derivative, called credit-default swaps.

By the same token, if real estate prices rebounded, A.I.G. has said, it could call some of the collateral back.

In addition to the $85 billion credit line and the $20.9 billion commercial paper program, A.I.G. has a $38 billion facility from the Fed that provides liquidity for the company’s securities-lending business. A.I.G. said on Thursday that it was currently using about $18 billion of this facility.

By tapping the newest source of money from the Fed, A.I.G. was able to reduce the amount it had borrowed under the original $85 billion line of credit, said a spokesman, Joe Norton. He said the company had currently drawn down $65.5 billion from that loan, compared with about $72 billion a week ago.

The Fed extended the original $85 billion line of credit at a steep price. On the part of the loan that A.I.G. draws down, it must pay an interest rate of 8.5 percentage points over the three-month Libor, an index rate for inter-bank lending. On the unused portion, A.I.G. must pay a fixed rate of 8.5 percent. In addition, the Fed added a 2 percent commitment fee to the total balance when it started the loan.

Mr. Norton said A.I.G. had incurred interest and fees of about $331 million so far. The Fed also took a majority stake in A.I.G. in exchange for the bailout, angering shareholders, who were almost completely wiped out.

The commercial paper program is much cheaper. The interest rate changes every day, but in the four days since the Fed started the program, the highest rate was just 3.89 percent.

A.I.G. is not the only participant. The Fed offered the program to all issuers of commercial paper in the nation to restart the stalled credit markets.

Mr. Norton said A.I.G. would use the newest source of funds for working capital, to refinance existing commercial paper, and to make voluntary prepayments on the $85 billion loan. He said that such voluntary prepayments would not reduce the total amount of the credit line available. If, by contrast, A.I.G. sold business assets and used the proceeds to pay down the loan, Mr. Norton said, the $85 billion balance would be reduced accordingly.

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