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.

FMI: www.aig.com, www.ilfc.com, www.federalreserve.gov/