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AIG Bailout: Breaking Up Is Hard to Do

Stocks in this article: AIG

American International Group (AIG) may have turned the government not only into a lender of last resort, but a buyer of last resort as well.

AIG, the battered insurance giant, is reportedly facing a loss of up to $60 billion on Monday, according to several news outlets, and has received only paltry bids on several prized businesses it's been trying to sell to repay a massive government loan. A combination of factors -- a weak economic outlook, few bidders and those bidders' knowledge that AIG is desperate to sell -- have complicated the firm's efforts.

In exchange for $150 billion in emergency funds last fall, the Federal Reserve Bank of New York received a nearly 80% stake in AIG in the form of preferred stock. AIG is required to pay out hefty dividends on those shares, but as it faces additional losses, AIG and the government are hammering out a new repayment plan and considering radical options to keep the struggling firm afloat.

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Part of AIG's plan to repair its balance sheet and work back toward profitability was to scale down its gigantic amalgam of operations. It would hold onto its core property and casualty businesses, and some of its general and life insurance businesses abroad as well. The toxic assets that initially sent AIG to the brink of destruction -- $39.3 billion worth of residential-mortgage-backed securities and $16 billion in collateralized-debt obligations -- were placed into a "bad bank" structure to be managed by the New York Fed. Related credit default swaps were extinguished.

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