U.S Treasury Buys $40B of AIG Shares, New York Fed to Lend $30B to LLC, Nortel Networks to Reduce Costs by $400M
- Nov 10, 2008
In a deal with the U.S. Treasury and the Federal Reserve Board, American International Group Inc. (AIG) restructured the government’s financial support with the U.S. Treasury purchasing $40 billion of newly issued AIG preferred shares under the Troubled Asset Relief Program. This purchase will allow the Federal Reserve to reduce from $85 billion to $60 billion the total amount available under the credit facility established in September. The Fed also gave the thumbs up for two new lending facilities including a Residential Mortgage-Backed Securities Facility that will lend up to $22.5 billion to a newly formed limited liability company (LLC) to fund the purchase of residential mortgage-backed securities from AIG’s U.S. securities lending collateral portfolio. AIG will make a $1 billion subordinated loan to the LLC and bear the risk for the first $1 billion of any losses on the portfolio. Because of this loan, an Oct. 8 lan of $37.8 billion will be repaid and terminated. In the second new facility, the New York Fed will lend up to $30 billion to a newly formed LLC to fund the LLC’s purchase of multi-sector collateralized debt obligations (CDOs) on which AIG Financial Products has written credit default swap (CDS) contracts. AIG will make a $5 billion subordinated loan to the LLC and bear the risk for the first $5 billion of any losses on the portfolio. AIG said taxpayers will own 77.9 percent of the equity of AIG and will hold warrants to purchase an additional 2 percent equity interest to benefit from any future appreciation in AIG shares.More bad news stateside with Nortel Networks Corp. planning to reduce costs by $400 million in 2009 by eliminating 1,300 jobs, according to Marketwire. Overseas,Hong Kong’s stock benchmark advanced 3.5 percent today after China unveiled a $586 billion package to protect its economy from a rapidly unfolding global slowdown, according to an Associated Press report. The blue-chip Hang Seng Index gained 501.20 points to 14,744.63. Investors welcomed the government’s $586 billion stimulus package, announced Sunday, which will offer a mix of spending, tax cuts and other measures in hopes of keeping economic growth from falling too fast.