Let’s see, AIG had to ask to be included in the Fed’s new commercial paper program. AIG was reported to have said it needed a wee bit more money, but no more than $10 billion. No reasons were given in any news stories.
Now we find out the intended use. From Reuters (hat tip reader Steve A):
American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) reduced the amount it owes under a U.S. Federal Reserve credit line by $6.8 billion, but only by borrowing from a different government lending program.
AIG currently owes $83.5 billion under two emergency facilities from the Fed, which were necessary to prevent the company from filing for bankruptcy. That figure was $90.3 billion a week ago.
An AIG spokesman said neither the company nor the Fed plan to disclose the exact amount the Fed was repaid.
The company was able to repay part of the amount already borrowed by voluntarily participating in a program that the Fed started on Monday to buy short-term debt known as commercial paper from companies.
Surprisingly, a Bloomberg story on the same
snookering gamesmanship was entirely approving and indicates the amount borrowed through the CP program to repay the other credit lines was even larger:
American International Group Inc., the insurer bailed out by the U.S., reduced its debt under two credit lines to $83.5 billion by using cash from the Federal Reserve’s commercial paper program.
The insurer got as much as $20.9 billion from the program, which swaps commercial paper for cash, AIG spokesman Nicholas Ashooh said yesterday in an interview. The terms of the commercial paper funding are better than the U.S. loan made last month to save New York-based AIG from collapse, he said.
“They’re paying off a Fed loan with another kind of government subsidy — it’s like using one credit card to pay off another credit card,” said Robert Haines, an analyst at CreditSights Inc. “If they make progress paying off debts over time, I don’t think it’ll be viewed as necessarily a bad thing.”
The interest on the $85 billion Fed facility is 8.5% over Libor, which (assuming it was 3 month Libor) is 3.19$, for a total of 11.69%. The commercial paper rate was 1.74% today plus an additional 1% for firms that did not post collateral. Thus the most AIG would be paying for the CP is 2.74%, almost 9% lower than the initial rescue package.
The terms of that were designed to be punitive but the Fed let AIG slip its supposedly short leash.