AIG Aircraft Lease Unit Says Survival at Risk, May Need Government Funding

When AIG first went to the government for rescue funding, the insurer had said it would pay the proceeds of the emergency loans from the sale of assets, meaning some of its subsidiary businesses. As we now know, that effort did not bear fruit.

One unit that was a candidate for sale, AIG’s aircraft lease unit, ILFC. However, in a reversal, instead of IFC possibly being a source of funding for the troubled parent, where the credit default swaps sit, ILFC now says it may need a bailout of its own.

Note earlier news reports had said the government might need to assist a buyer of the aircraft lease operation.

From Bloomberg:

American International Group Inc.’s plane-leasing unit said it may not be able to survive without help from its parent company or new access to credit….

AIG, which received a government bailout valued at $182.5 billion, is trying to find a buyer for ILFC as the unit loses customers because of “financial stress” in the airline industry. Paula Reynolds, AIG’s chief restructuring officer, has said federal financing may be available to the buyer of the firm to help prop up the unit after a sale.

AIG said earlier this month it will need to “provide support” with asset sales or funding because ILFC’s operations are “inadequate” to meet debt obligations for 2009. The regulatory filing today says New York-based AIG has committed to support the plane unit’s short-term liquidity needs until a sale or the end of March 2010…

AIG and the government agreed that should a qualified buyer for ILFC be found, “there would be some form of backstop financing available through the Fed in order to facilitate that sale and carry the new owners with some secured financing over at least the interim period,” Reynolds said March 2 on a conference call. “It is still possible actually to move forward on that transaction.”

ILFC earned $703.1 million in 2008, a 16 percent increase from a year earlier, as the unit added 55 planes to its fleet and revenue from renting flight equipment rose, the company said today. Fourth-quarter profit fell 34 percent to $115 million, and 12 of ILFC’s customers filed for bankruptcy last year.

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  1. David Merkel

    Hi Yves. The backstory on this one is that the founders of ILFC received AIG stock at the purchase back in ?90-91, and sold few shares. They didn’t want to pay the taxes.

    Now they don’t much capital to put into ILFC, much as they want to continue running it.

    Even during the AIG boom years, ILFC was a regular issuer of bonds not guaranteed by AIG. They yielded more and were lower rated. There was parental support, but it went both ways.

    Now, ILFC should have no systemic risk implications — both major aircraft lessors have gone bankrupt or close in the past, and the economy as a whole did not suffer. The planes still flew. Boeing didn’t die, not that that matters either.

    PS — Much as I think they both have talent, this problem is bigger than Ed Liddy and Paula Reynolds could fix. I’m not sure anyone could — I think AIG is fundamentally insolvent, and even Maurice R. Greenberg could not resurrect it.

  2. Anonymous

    Is it becoming the new policy of America to bailout all organizations that make bad financial decisions at taxpayers expense? And at the same time punish individuals that do the same?

    This is not the America they teach in school.

    We keep digging down. When will it stop?


  3. Martin, the Netherlands

    We live not too far from Schiphol Airport, near Amsterdam, and we noticed that the number of planes passing overhead is distinctly smaller than it used to be. If less planes are needed, why should anyone be interested in buying an aircraft leasing company?

  4. Anonymous

    So, if I understand well, the bailout was necessary so that the big counterparties (the French Banks, Deutsche and Barclays, and, of course, eventually Goldman etc) would get their money back, ahead of a proper bankrupcy?

  5. daveNYC

    It says 12 of their customers filed for BK, but it doesn’t say what % that is, either of customers or revenue. Either way, I can’t see someone being to eager to get into the business.

  6. Martin, the Netherlands

    @ Anonymous: That’s about rigt, I think. It would seem to me that there were three options: (a) Supply AIG with enough money to honour its contractual obligations. (b) Let AIG go bankrupt. (c) Supply AIG with enough money to pay its American counterparties, and tell the rest of the world that the American taxpayer has enough worries of his own. Option B would have been equally damaging to a lot of American counterparties, I’m not able to even guess how bad it would be, but probably pretty bad. Option C would have been quite possible. But the downside would have been that the rest of the world might become just a tiny but worried about the safety if its American investments -like the Chinese PM. So it had to be option A. And it is quite likely that when the next chunk of CDS contracts have to be paid -for instance, when GM and Chrysler go into a nice pre-packaged bankruptcy- and AIG is going to foot the bill ance again, the American taxpayer is going to find his tax dollars, again, being put to good work. Viz, ensuring that the continuous flow of money towards the U.S. does not get interrupted. I’m sorry, but I’m afraid that this how things are.

  7. Bernanke is not a lawyer!

    Connecticut’s attorney general on Tuesday also disputed Federal Reserve Chairman Ben Bernanke’s assertion that blocking AIG’s controversial bonus payments would violate state law.

    AIG has become a lightning rod for populist anger after giving out $220 million in bonuses, including $55 million paid in December, to some executives after receiving a $180 billion government bailout to prevent its collapse.

    A letter to AIG’s lawyers from Connecticut Attorney General Richard Blumenthal and state lawmakers expressed “deep concern and frustration” over AIG’s “lack of cooperation.”

    Blumenthal also criticized Bernanke for testifying in Congress that Connecticut’s wage law posed a barrier to any lawsuit seeking to block AIG’s bonus payments.

    Bernanke told the House Financial Services Committee that he supported such a lawsuit but that his legal counsel advised him not to pursue one because of Connecticut’s laws.

    “The Federal Reserve never contacted me or my office concerning the applicability of the Connecticut wage law to the AIG bonuses. If the Fed had called, we would have given the green light for litigation blocking these unconscionable bonuses,” Blumenthal, a Democrat, said in a statement.

    In a telephone interview with Reuters, Blumenthal added that he would write to Bernanke urging him to go through with a lawsuit against AIG.

    “Clearly there is nothing in our wage protection statutes that prevents a lawsuit blocking bonuses,” he said.

    Blumenthal disputes that assessment. “They are not wages under our law,” he said in a telephone interview. “AIG used this joke of a justification to squander $218 million of taxpayer money, rewarding monumental failure.”

    Bob Duff, a Democratic state senator who is co-chair of the Legislature’s General Assembly Banks Committee, also disputed Bernanke’s assertion that state law would derail a lawsuit.

    “Mr Bernanke may be an economist but he is no lawyer,” he said. “I will take the state attorney general’s opinion that he could have sued to get the bonus money back.”

  8. 1 quadrillion and counting

    From May of last year:

    Derivatives, including those based on debt, currencies, commodities, stocks and interest rates, expanded 44 percent from the previous year to $596 trillion, the Basel, Switzerland-based bank said in a report today. The amount of credit-default swaps protecting investors against losses on bonds and loans more than doubled to cover a notional $58 trillion of debt.

    >> Now the story is: Toxic Assets Were Hidden Assets

    Today's global crisis — a loss on paper of more than $50 trillion in stocks, real estate, commodities and operational earnings within 15 months — cannot be explained only by the default on a meager 7% of subprime mortgages (worth probably no more than $1 trillion) that triggered it. The real villain is the lack of trust in the paper on which they — and all other assets — are printed. If we don't restore trust in paper, the next default — on credit cards or student loans — will trigger another collapse in paper and bring the world economy to its knees.

    If you think about it, everything of value we own travels on property paper. At the beginning of the decade there was about $100 trillion worth of property paper representing tangible goods such as land, buildings, and patents world-wide, and some $170 trillion representing ownership over such semiliquid assets as mortgages, stocks and bonds. Since then, however, aggressive financiers have manufactured what the Bank for International Settlements estimates to be $1 quadrillion worth of new derivatives (mortgage-backed securities, collateralized debt obligations, and credit default swaps) that have flooded the market.

  9. Anonymous

    “The national economic outlook remains bleak,” wrote David Shulman, a senior economist for UCLA.

    “As a result of the prolonged contraction, the economy will likely lose 7.5 million jobs peak to trough and unemployment will soar.”

    The researchers cite the unprecedented losses to U.S. balance sheets — $9 trillion in stocks and $5.5 trillion in home values.

    UCLA Anderson Forecast: dark days

    But, remember, Bernanke and Timmy think and Brother O think all is well….. but don’t yah think we need some accountability versus hype and bullshit for wall street?

    Also see:
    One of the most common examples given for diffusion is opening a perfume bottle in a closed room. However,
    in this example (and many others) molecular diffusion is not the dominant mechanism. Bulk motion of the fluid is
    often responsible for most of the mixing effects that we experiencein liquids and gases. While diffusionis important
    in the detail of these processes, convection is what we most often experience. Were it not for convective motions in
    the air it would take us one year to smell our feet after taking off our shoes (Squires and Quake 2005). Likewise,
    it is the stirring of the milk in the coffee that mixes it; molecular diffusion would take so long that the drink would
    long spoil and evaporate long before it was mixed.

    How much tax payer cash will Obama spend to repair our shattered perfume bottle, versus being honest about the fact that we need a new vehicle to hold our economy together? Timmy is busy playing with ways to keep his buddies in place for XMAS bonuses and give them a chance to show how valuable they are, and for some reason, it seems to me, they rely on everyone else being either in denial or looking away from this theft. Wall street is too big too fail, because it is a game of accounting fraud, which is embedded in the corruption of our government and until we cut this cancer out and rid ourselves of this destructive process, we are doomed as a nation….

    Amen and I really, honestly believe that Timmy and Ben are part of the problem….. where is Volker?????? Where is honesty??? What is going on here with AIG and everyone looking away at the money being burned, and I don’t mean a few hundred million or billion, I’m talking multi-TRILLIONS…… huh, huh????? Wake up out there!

  10. Anonymous

    If we don’t bailout AIG’s airplane leasing business, the world economy will implode…;.


  11. MyLessThanPrimeBeef

    AIG can lose its Aircraft Lease Unit as long as it keeps its Starship Lease Unit.

    Watch out, folks, we are going to go boldly where no man has gone before! Just don’t ask me where.

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