Insurer Lives To See Tomorrow... But ILFC Likely On Auction
Block
In a move
that, until two weeks ago, would have been termed "unprecedented,"
late Tuesday the US Federal Reserve agreed to loan embattled global
insurance and investment firm AIG a total of $85 billion, in
exchange for an 80 percent stake in the 89-year old Wall Street
stalwart.
The capital infusion means the diversified company -- which, in
addition to its sizable stakes in the global finance and insurance
industries, also owns aircraft lessor International Lease and
Finance Corporation, and holds policies for many private aircraft
owners -- will survive to see tomorrow, and most likely the next
day.
CNN Money reports the Fed authorized the Federal Reserve Bank of
New York to loan the funds to AIG, at a fairly steep 11 percent
interest rate. That move came after last-ditch efforts by the
company to find private investors -- those who
didn't want to take control of the storied
company -- failed.
The loan will be backed by AIG assets... and is expected to be
repaid through funds earned through the sale of many of those
assets.
"[A] disorderly failure of AIG could add to already significant
levels of financial market fragility and lead to substantially
higher borrowing costs, reduced household wealth and materially
weaker economic performance," the Fed said in a statement.
And the Fed knows something about market fragility... having
performed similar bailouts within the past two weeks of federal
mortgage lenders Freddie Mac and Fannie Mae. Like AIG, those
lending institutions were hit hard by the downfall of the subprime
home lending market earlier this year.
AIG has lost a combined $13.2 billion so far this year. Since
Friday, shares in the company have plummeted to just north of
worthless.
"We are working closely with the Federal Reserve, the SEC and
other regulators to enhance the stability and orderliness of our
financial markets and minimize the disruption to our economy," said
Treasury Secretary Henry Paulson. "I support the steps taken by the
Federal Reserve tonight to assist AIG in continuing to meet its
obligations, mitigate broader disruptions and at the same time
protect the taxpayers."
So -- what
does all this financial gobbly-gook mean for the aviation industry?
For starters, pilots who have their aircraft insured through AIG
Aviation can rest assured their planes are still covered... an
important consideration for owners whose planes were damaged by the
recent hurricanes along the US gulf coast.
And it's likely that one of the assets to be sold will be ILFC,
one of AIG's truly profitable enterprises. The global aircraft
lessor is posting record numbers, fueled by global demand for new
airliners.
AIG hinted earlier this year
that it planned to cut ILFC loose... but one
month later, ILFC chief Stephen Udvar-Hazy joined AIG officials in
stating the aircraft leasing giant would remain part of AIG's
portfolio.
Given the extent of AIG's woes, the company must weigh the
benefits of obtaining needed capital now by selling ILFC... versus
reaping untold profits down the line.