Why Does AIG Need So Much Cash From the Fed? (Update)

Updated from Thursday, Oct. 9

It took AIG (AIG Quote) less than a month to burn through more than $70 billion of the $85 billion bridge loan that the Federal Reserve provided it last month.

The insurance giant has drawn down $70.3 billion of that rescue facility, with much of the cash being used to cover credit default swaps, says Joe Norton, director of public relations at AIG. However, because the company is no longer able to obtain cash from the usual market sources due to the credit freeze affecting business all over the U.S., the Fed late Wednesday agreed to back up to $37.8 billion more.

This latest Federal support will back a $37.2 billion securities lending program that AIG operates to provide working capital. Under this agreement, the Fed will act as a counterparty, or lender of last resort, to a maximum amount of $37.8 billion, just slightly more than the size of the securities-lending program. Norton says AIG now has the ability to access the cash, which will be provided by the Federal Reserve Bank of New York and secured against investment-grade fixed securities provided by its domestic life insurance companies. ...