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To: Johnny Canuck who wrote (45075)	10/12/2008 7:14:19 AM
From: Johnny Canuck	Read Replies (1) \| Respond to of 71139

Market Scan AIG's Play For Time Maurna Desmond, 10.12.08, 6:00 AM ET American International Group Tear Sheet Chart News pic The Bailout: An Owner's Manual The British Way Is Better Wildcats, Defaults And A Near-Death Experience Beyond The Bailout Popular Videos Ironman COO American Panic. Asian Confidence The Economy Is The Story Intel's Chairman On Innovation Inside The Forbes 400 Most Popular Stories Fashion Fortunes Lords Of Leisure 25 Years Of Wealth Media Billionaires The Forbes 400 American International Group is sending good paper after bad. U.S. government-controlled insurer American International Group (nyse: AIG - news - people ) which on Wednesday was given a $37.8 billion credit line on top of the $85.0 billion bailout loan it received last month, is trying to hold onto damaged mortgage-backed securities until they regain some of their lost luster. By borrowing even more money from the Federal Reserve, AIG is buying time, hoping for a recovery in the sickly credit markets. The new money will be used to help unwind AIG's security-lending program. That program involved lending debt securities held by AIG's life insurance subsidiaries to banks and brokerage houses, which paid face value or even a bit more. AIG took the cash and invested it in floating-rate bonds. Though complex, this melding of securities repurchase deals and interest-rate swaps has been used by insurers as a stable source of income. The ultimate success of the program really comes down to what the insurer chooses to buy with the cash. Unfortunately, AIG had an appetite for mortgage bonds. Now the other parties to the lending deals want their cash back. Since AIG invested about three-quarters of it in the heavily battered mortgage-backed securities market, it doesn't have the money. What it would like to do is wait for the credit markets freeze to thaw out, which is where the Federal Reserve's credit line comes in. The central bank is taking the original securities -- which are investment-grade -- and allowing AIG to borrow against them to exit the lending programs. “The two big drains to liquidity for AIG are credit default swaps and the securities lending program,” said Nick Ashooh, a spokesman for the insurance company. “We’re basically trying to wind them down, but credit default swaps are contracts so you can’t just walk away, and securities lending is the same.” Uncle Sam will pay what it considers fair value for AIG's investments, rather than the open-market price, which might be lower. It is sensible for the Fed to be generous in this regard since it owns 79.9% of AIG. But the concern for taxpayers is that the Fed will get stuck with securities for which it overpaid. The dilemma echoes the issue in the Treasury's $700.0 billion financial bailout package. If the government pays above-market rates for mortgage-backed securities held by financial firms, as is envisaged under the bailout, it might suffer losses. The securities the Fed is borrowing from AIG, however, seem to be of much higher quality; in this case, it's the insurer that gets stuck with the mortgage-backed paper, not the government. But of course, AIG, these days, IS the government. Mostly. So it's mainly a case of taking money from one pocket and putting it in another. "This is a more efficient way to deal with a pure liquidity issue," said Christopher Swift, chief financial office of AIG’s life insurance business.. “Instead of selling the securities we own in the open market, we can lend them out [to the Fed] for cash,” Swift said. “It’s a form of leverage, financing, that lets you work out the monetization of the mortgage-backed securities pool over the longer term so you don’t have to sell at fire-sale prices.” Swift said the Fed had already taken securities twice from AIG, on Thursday and Friday, using the new facility. He did not say how much was borrowed, other than to characterize it as a fraction of the available credit line. He said he did not think AIG would have to use the whole line. While it tries to wriggle out of its securities-lending business, AIG is supposed to be selling assets to generate money to repay the $85.0 billion loan. The insurer said earlier this month that it would pare holdings to focus on its property-casualty insurance and foreign general insurance businesses. (See "AIG Decides It's Too Big To Succeed." ) As of Friday, it had not announced any sales. On Friday, AIG shares slipped 2.5%, or 6 cents, to $2.33, recovering from a 12-month low of $1.90. A year ago, before the subprime loan crisis upended the world's financial markets, the company traded above $65.