Ongoing Government Assistance for American International Group (AIG)

Baird Webel
Specialist in Financial Economics

In the beginning of 2008, American International Group (AIG) was one of the world's largest insurers, generally considered to be financially sound with an AA credit rating. By the end of the year, it had undergone a near bankruptcy and had been forced to seek up to $173.4 billion in financial assistance from the U.S. government. The CEO had been replaced at the government's behest, executive compensation was under limits, and shareholders in AIG had been nearly wiped out as their equity was diluted by a new 79.9% stake held by the government. The government assistance to AIG has been largely ad hoc. The overarching AIG holding company was regulated by the Office of Thrift Supervision (OTS), but because the company was primarily an insurer, it was largely outside of the normal Federal Reserve (Fed) facilities that lend to thrifts facing liquidity difficulties. AIG was also outside of the normal receivership provisions that apply to banking institutions. Had AIG not been effectively deemed "too big to fail" and given assistance by the government, bankruptcy seemed a near certainty in September 2008. 

The losses that led to AIG's essential failure resulted largely from two sources: the state-regulated AIG insurance subsidiaries' securities lending program and the AIG Financial Products (AIGFP) subsidiary, a largely unregulated subsidiary that specialized in financial derivatives. The transactions that led to the immediate losses were dealt with relatively quickly in 2008, albeit with significant outlay of government funds. Although the securities lending program was relatively straightforward to discontinue, the AIGFP derivative operations extended well beyond the transactions that caused the immediate losses and are taking longer to wind down. The overall AIGFP derivative portfolio remains significant, as AIG reported approximately $940.7 billion in notional net value of derivatives at the end of 2009. 

The government assistance to AIG began with an $85 billion loan from the Fed in September 2008. This loan was on relatively onerous terms with a high interest rate and required a handover of 79.9% of the equity in AIG to the government. As AIG's financial position weakened, several rounds of additional funding were provided to AIG and the terms were loosened to some degree. The current major restructuring of the assistance to AIG was announced in March 2009 and comprises (1) $47.3 billion (of up to $68.8 billion) in capital injections through preferred share purchases by the Treasury; (2) $25.3 billion (of up to $35 billion) in extraordinary loans from the Fed; (3) $24.8 billion in Fed loans retired by equity interests provided to the government by AIG; (4) $2.3 billion in Fed loans through the Commercial Paper Funding Facility; and (5) $43.8 billion (of up to $52.5 billion) in Fed loans for troubled asset purchases—assets that are now owned by the government. 

Congress has held several hearings specifically focusing on the intervention in AIG. Congressional attention and anger has been focused on perceived corporate profligacy, particularly bonuses for AIG employees. Bills that would place specific taxes on or otherwise restrict such bonuses include H.R. 1586, passed by the House on March 19, 2009; S. 651, introduced on the same day; and H.R. 1664, passed by the House on April 1, 2009. 

The future of AIG and the ultimate government cost of the intervention are unclear. Recently announced asset sales by AIG may repay all of the Fed loans, but this would leave the Troubled Asset Relief Program (TARP) preferred shares outstanding. Recent estimates of the losses on the TARP funding range from $9 billion to $49 billion.


Date of Report: March 18, 2010
Number of Pages: 18
Order Number: R40438
Price: $29.95

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