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Treasury close to deal on recouping taxpayer investment in AIG

By Brady Dennis
Washington Post Staff Writer
Wednesday, September 29, 2010; 10:27 PM

The Treasury Department and American International Group were "very close" Wednesday to finalizing a deal aimed at recouping the massive taxpayer investment that helped save the global insurance company from collapse in 2008, according to sources familiar with the matter.

Under the terms of the agreement, Treasury plans to convert its $49 billion in preferred shares in AIG into common equity, effectively taking a 92 percent ownership stake in the company. The U.S. government currently holds a 79.8 percent stake.

Any such conversion probably would not take place until 2011, and the government would subsequently sell its shares to investors over time.

Under that arrangement, AIG's share prices will play a key role in how much money the U.S. government can recover for taxpayers.

Shares of AIG closed Wednesday at $37.45, up 0.4 percent.

"This deal going forward gives us the ability to reduce that [debt] substantially, even to zero," said an administration official who spoke on the condition of anonymity because the deal had not been announced publicly. "We could even make money off of it."

The notion of transferring Treasury's preferred AIG stake into common shares and selling them over time isn't unprecedented. The government took a similar approach with a portion of its stake in Citigroup last year.

If successful, the approach could represent a triumph for the company and the government, which committed more than $180 billion to rescuing AIG during the financial crisis. The strategy depends on AIG's ability to convince investors that it can operate as a viable insurance company.

Before AIG can satisfy its obligations to the Treasury, it must first make good on more than $20 billion in loans that it still owes to the Federal Reserve.

The company plans to eliminate that debt in coming months when it completes the sale of American Life Insurance Co., or Alico, to MetLife for $15 billion and undertakes a public offering of shares in Asia-based American International Assurance.

AIG's board of directors was expected to finalize the deal at a meeting Wednesday in New York.

Edward M. Liddy, who was appointed chief executive of AIG in the wake of the government bailout, told lawmakers before resigning last year that he thought the beleaguered insurance company could pay back the federal government's massive investment in three to five years, depending on "what happens with the worldwide economic situation."

His successor, Robert Benmosche, has if anything expressed even greater confidence that AIG will make good on its debts, perhaps sooner than expected and possibly with interest.

"I believe that we will pay back all that we owe the U.S. government. And I believe at the end of the day the U.S. government will make an appropriate profit," he told members of the Congressional Oversight Panel in May. "I am confident you're going to get your money plus a profit."

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