(AFP) – Oct 8, 2008
WASHINGTON (AFP) — The Federal Reserve said Wednesday it had authorized a new 37.8-billion-dollar cash infusion into insurance giant AIG, which is under fire over a lavish spa retreat paid for by the company after its rescue by the government.
The newly nationalized company, saved from bankruptcy last month and propped up with increasing quantities of public money, has burned through the majority of its first line of credit of 85 billion dollars.
Possibly more damaging for its image, it has been accused of treating executives to a lavish spa retreat costing hundreds of thousands of dollars after the US government rescued the firm in mid-September.
On Wednesday it hit back, saying no executives from headquarters had attended the event which was for independent agents that bring business to the company.
In a hearing in the US House of Representatives on Tuesday, Democratic Congressman Henry Waxman had criticized the company for paying 440,000 dollars for a Pacific Ocean getaway "less than one week after the taxpayers rescued AIG."
In a letter sent to US Treasury Secretary Henry Paulson on Wednesday, chief executive Edward Liddy wrote that "no AIG executives from headquarters attended" and the event was planned months before the federal rescue.
President George W. Bush's chief spokeswoman added fuel to the growing sense of outrage however.
"I understand why the American people would be outraged. I am. It's pretty despicable," Dana Perino told reporters.
The Fed said the new cash authorized Wednesday would be transferred to AIG from the New York Fed, which would take securities from AIG and inject cash in return.
"The New York Fed will borrow up to 37.8 billion dollars in investment-grade, fixed-income securities from AIG in return for cash collateral," a statement from the Federal Reserve said.
A spokesperson for AIG told AFP the insurer had used 61 billion dollars of the original 85-billion-dollar loan.
Far more than other insurers, AIG has been a big player in a complex market called credit default swaps (CDS), financial instruments in which Wall Street companies take out a form of insurance against the risks of bond defaults.
These products, often linked to the US real estate market, are at the heart of the current banking crisis and have exposed AIG to massive losses.
The Fed explained that the new loan to AIG was because the company needed the cash to settle payments to counterparties.
AIG's Liddy had warned on October 3 that the group might need more money from the Fed.
"We don't know exactly where the borrowing from the Federal Reserve will top out at, and the reason we don't know is we don't know what market conditions will be like," he said.
The US Federal Reserve agreed in mid-September to the loan of 85 billion dollars to stave off the collapse of AIG.
The deal gave the US government a 79.9-percent stake in the insurance behemoth, which it considered too big too fail.
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