More Funds Flow Into AIG Black Hole

March 2, 2009

(bettertrades) - On Monday, feds injected another $30 billion into American International Group who no longer has to pay dividends to the government. The latest rescue plan involves taking more of the non-performing assets in yet another attempt to unwind some of the frozen credit default swaps.

AIG can drawdown $30 billion in exchange for new preferred shares while the current $40 billion in preferred shared will be converted into new shares that resemble common equity. The complete details of the AIG rescue include:

• $30 billion equity line from the TARP
• Elimination of $4 billion dividend outlay
• American Life Insurance Co (Alico) and American International Assurance (AIA) placed into special purpose vehicles.
• Credit facility remaining at least $25 billion with Libor floor removed
• AIG to sell minority stake in AIU Holdings

The latest bailout comes as AIG flirts with being downgraded again after reporting a widening Q4 loss to $61.66 billion ? representing the biggest quarterly loss in history -- exponentially worse than the $5.29 billion loss in the same period last year. During 2008, AIG lost $99.3 billion, or $37.84/share.

The federal government has provided $163 billion in aid to date to the ailing insurance giant, upping their ownership stake in AIG to 78%.

Credit rating agencies who previously failed to recognize the massive risk of default swaps are now signaling the federal infusion will suffice to prevent a downgrade. Needless to say, the stature of credit rating agencies is on shaky footing.

AIG, who infamously threw lavish year-end corporate parties after obtaining billions in taxpayer dollars, has become the poster child for how to misbehave while receiving federal assistance. Making matters even more comical, AIG filed a lawsuit against the IRS on Friday claiming immunity from $306 million in tax arbitrage transactions. AIG is no longer just borrowing from Peter to pay Paul. Now, they are suing Paul to pay Paul, or in this case, suing Uncle Sam to one day pay back Uncle Sam.

Most worrisome is that there appears no end strategy, no term sheet detailing a specific game-plan for stabilization or recovery. Taxpayers have received little to no explanation for why the U.S. is continuing to poor money into the black hole that has become AIG. The consequences and more hazard of letting AIG fail remain a heated subject of debate. Unfortunately for the American public, the silence emanating from Treasury and the White House is deafening.