AIG Arbitrages the Fed Via Its New Commercial Paper Program

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.

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  1. John Liberty

    is moral hazard even an issue anymore? wtf is going on..big bonuses during a recession, non punitive measures against AIG, and the consumer is taking the brunt of this downturn. this is totally outrageous. i am extremely angry.

  2. Richard Kline

    Because the Federal government in the person of Hank Paulson and his hierlings refuse to _tell_ anyone what they must do in exchange for government support, they are the (intentional) prisoners of their borrowers who are begged to take the public’s money ‘for the good of the economy.’ This is ugly in the extreme, but I for one don’t mind a bit. Why?: There could be no better advertisement for the benefits of socialism then watching desperate plutocrats steal nakedly from the community chest in a time of common peril and loss. Go on, Big Dogs; keep chewing on our foot. In eighteen months give or take, we pick up a club, and then roast a few dog steaks.

  3. Richard Kline

    And, BTW, it would appear that the Fed has bought up ~%150B of corporate paper in barely a week, obviously with few if any questions asked. Can anyone think of a larger expenditure in as short a time by a single lender, public or private, _ever_?

    I will be very interested to see if Paulson’s methods and pace change markedly AFTER the election. I’m not saying that Republicans saving each other is the main driver in this ‘hurry up and fund’ process of the last six weeks. That said, anyone who thinks that it isn’t a _significant_ driven hasn’t been following politics in the US for the last fifteen years. We shall see . . . .

  4. peterxyz

    on the commercial paper side of the equation, you need to add in the committment fee that they are on the hook for on the $85bn anyway (from memory not cheap)

  5. Anonymous

    Seems to me that since there are still public shareholders, and any movement here is MATERIAL, that an 8-K should be filed regarding the amount. The Fed is allowing AIG to violate its disclosure obligations per SEC rules. Nice.

  6. mr curious

    AIG should borrow 200 billion via the CP program, pay off their Fed debt, and buy mortgages yielding 6%+ and make a fortune. maybe sell some CDS too. Oh wait, they did that already and it didnt work with shareholder money. maybe using taxpayer money it will work this time. (worth a try)

  7. Grant Case

    Whichever the next adminstration is can we please put the black hole that is AIG out of its misery. Thank you.

  8. jck

    AIG has to pay 850bp as a commitment fee if NOT drawing the line and libor+850bp when drawing, they will use the CPFF if the rate is lower than Libor and save Libor-CPFF rate, using your number they are paying 274+850, instead of 319+850

  9. fresno dan

    I am SHOCKED, SHOCKED and APPALLED, (Claude Raines accent) to find financial arbitrage going on with taxpayer funds. Indeed, super duper shocked

  10. fresno dan

    serious question to the commentators:
    Are our regulators:
    stupid and venal
    please provide your rationale
    OK – I am being biased:
    Is there a justifiable reason for how AIG behaves?

  11. Anonymous

    1. People have a innate desire for status.

    2. Money gives people status.

    Thus, people want money.

    If you set up a system in which people can get money without breaking the law, they will take the opportunity to get that money.

    Executives at AIG know they can continue taking large amounts of eggs (money) as long as they keep the goose alive.

    SHOCKED, indeed!

  12. Anonymous

    Why should AIG be penalized when the Banks are getting a pass? AIG should have the same deal the banks do. It is in our national interest to keep such a great company from going under, particularly with all the foreign currency it brings in every year – 50B+

  13. Yves Smith

    Anon of 2:28 PM,

    I assume you are joking, but if not, the fact that the banks are being coddled is no excuse for further handouts. That is like saying because OJ Simpson got away with murder (if you are of that view) that no one should ever be tried for murder. Faulty logic.

  14. Anonymous

    "The internal auditor resigned and is now in seclusion, according to a former colleague."

    let's hope whereever he is, he has internet access, so he can come on naked capitalism & start spilling the beans.

    anonymously, of course.

  15. Anonymous

    AIG must have a nice big warehouse full of intelligence information from all the insurance investigations it’s done over the years.

    like maybe where some of the “bodies” are buried for instance?

    and you wonder why they’re being kept alive?

    OJ’s got nothin on AIG

    then again, AIG’s got nothin on karma

  16. Anonymous

    AIG is deeply connected to the most corrupt elements of the federal government. No questions asked, no details given, for good reason. You don’t want to know!

  17. john bougearel

    Are we the pooch in this Screw the Pooch mini-series now playing in theaters throughout D.C.?

  18. Anonymous

    “You don’t want to know!”
    Sorry, enquiring minds want to know.
    Ignorance is no longer bliss.

Comments are closed.