AIG's losses were driven by unfavorable credit market conditions and writedowns on its investments, including credit default swaps and residential-mortgage-backed securities that were wiped off AIG's books and placed into a facility run by the Federal Reserve Bank of New York last Fall.
As part of a rescue plan outlined at the time, the Fed lent AIG $60 billion in exchange for preferred stock with hefty dividends. AIG has drawn $38 billion from the facility, but was unable to pay its debt, forcing the government to ease up on terms in a broad restructuring plan outlined Monday.
The Fed will now reduce AIG's revolving credit facility and will accept payment for the $38 billion loan plus interest in the form of preferred stock in two relatively healthy AIG subsidiaries, American Life Insurance Co. and American International Assurance Co. The Treasury also said will exchange its existing $40 billion in preferred AIG stock for new preferred shares "that more closely resemble common equity and thus improve the quality of AIG's equity and its financial leverage."