AIG's $173 Billion 'New Deal' With America

American International Group (AIG Quote) has finally accepted the fact, as we've been saying for weeks, that it's running out of cash.

AIG CEO Edward Liddy said in a company conference call Monday that AIG "cannot continue to hemorrhage cash. We need to stop it and stop it now."

The U.S. taxpayer is now committed to its own "New Deal with America" with the insurer via a restructured bailout for AIG that stems the Federal Reserve's continuous dipping into the taxpayer-funded coffers of the U.S. Treasury in exchange for 77.9% of AIG.

This third deal is intended to provide relief to AIG by easing the terms of borrowing to become more sustainable and at commercial rates, as well as give the shareholder, or taxpayer, a direct ownership stake in AIG by investing in preferred shares and warrants. It will also put an end to the uncertainty over a substantial portion of the risk associated with AIG, its credit default swaps.

There are five separate parts to the restructured deal.

1. The original $85 billion loan facility with a current outstanding amount $61 billion will be reduced to $60 billion and the term of the loan extended from two to five years.
2. $40 billion will be invested in perpetual preferred shares and warrants totaling 2% of AIG common stock. The preferred shares will carry a coupon rate of 10%.
3. The $37.8 billion securities lending program with $19.9 billion outstanding will be discontinued and converted into a new company, funded with $22.5 billion in capital from the taxpayer and $1 billion from AIG. The assets will be the residential mortgage-backed securities owned by AIG previously used in the program.
4. The $20.9 billion commercial paper funding facility (CPFF), with $15.3 billion outstanding as of Nov. 5, will continue.
5. $30 billion of taxpayer funds and $5 billion of AIG money will be invested in a second new company designed to fund the $71 billion AIG multisector credit default swap portfolio. The counterparties have negotiated the price down to $35 billion, and the credit default swap paperwork will be "torn up."

AIG will retain risk for only two parts of the arrangements to form the new companies. It will retain risk on any further deterioration in the value of the assets being transferred, until the paperwork is complete, and the $6 billion that it is providing in funding. The new plan gives the taxpayer a further upside potential with the new separate companies, because once the asset values have been realized, any upside will be shared with AIG at the same percentage as the investment.

AIG's Liddy said in a conference call Monday morning that the transfer will be completed "ASAP, not tomorrow but as quickly as we can." Commenting on the announcement today, he said: "We have worked hard to fashion a comprehensive plan."