AIG finalizes plan to repay government
Friday, October 1, 2010
The Treasury Department and American International Group have finalized a deal aimed at restoring the troubled insurance giant to independence and repaying the massive taxpayer aid that rescued the company two years ago.
"This is a clear milestone in the history of AIG," the company's chief executive, Robert Benmosche, said in an interview Thursday, adding that he has "a lot of confidence" that taxpayers ultimately will make a profit on their investment and that the arrangement also represents "a good deal for shareholders."
The plan that AIG detailed early Thursday, more than nine months in the making, has several parts: Most significant is that Treasury would swap its preferred shares in the company, worth about $49 billion, for about 1.7 billion shares of AIG common stock. The deal will leave the federal government with a 92.1 percent ownership stake in AIG, up from its current stake of 79.8 percent.
Treasury expects to sell those shares to investors over time, meaning that AIG's stock price ultimately will determine how quickly the government can pull out of the company and how much of the taxpayer investment it can recoup.
"The exit strategy announced today dramatically accelerates the timeline for AIG's repayment and puts taxpayers in a considerably stronger position to recoup our investment in the company," Treasury Secretary Timothy F. Geithner said in a statement. "While there is a lot of work ahead to execute the terms of this agreement, today we are much closer to seeing a clear path out."
The transfer of Treasury's preferred stake into common shares of AIG that it will sell isn't unprecedented. The government took a similar approach with a portion of its stake in Citigroup last year, and it has since sold about 4.1 billion shares of Citigroup common stock for gross proceeds of about $16.4 billion. Treasury now owns 12.4 percent of the outstanding common stock in Citigroup and expects to continue selling its shares after the end of a blackout period set by Citigroup related to its third-quarter earnings.
If successful, the approach could represent a triumph for AIG and the government, which committed more than $180 billion to rescuing the company during the financial crisis. Success depends heavily on AIG's ability to convince investors that it can operate as a viable insurance company. In short, if the stock soars, taxpayers will reap the benefits. If it sinks, the government must either hold onto its shares or take a loss.
Before the Treasury transaction takes place, possibly in the first quarter of 2011, AIG must satisfy more than $20 billion in outstanding loans from the Federal Reserve Bank of New York. AIG plans to complete the $15 billion sale of American Life Insurance Co., or Alico, to MetLife and make a public offering of shares in Asia-based American International Assurance, both within the next month.
In addition, the New York Fed has a $26 billion stake in two "special purpose vehicles" that hold equity from Alico and AIA. Under the AIG plan, the company would draw down $22 billion of funds from the government's bank bailout program to essentially buy out the Fed's stake. AIG would then immediately transfer those interests back to Treasury, and apply proceeds from future asset sales to pay off any remaining debt to the Fed.
Benmosche said government officials approached AIG early this year, asking for an exit plan.
"Treasury came to us and said, 'We have to figure out how we're going to start getting out of here,'" Benmosche said. "That really began to get us to accelerate some of our thinking."
The effort stalled after an initial sale of AIA fell through earlier this year, and AIG considered waiting until November to finalize the exit plan. But Benmosche said officials recognized that the expiration of the government's bailout program in early October could spark another round of bad publicity.
"All of the negative headlines could have reemerged again," he said.
Clients and investors, he said, simply want assurance that AIG would be around in the future, and the deal with Treasury will help remove that doubt.
"The debate now is not whether AIG is going to be a ward of the state, whether it will fall apart," he said. Rather, it will be about "how much of a profit the government will make from AIG. . . . The fundamentals of the business are strong."
Benmosche said that before federal officials agreed to the new plan, they conducted a detailed examination of what the company was worth and spent hours with the board of directors discussing AIG units and future expectations.
The government largely nationalized AIG in September 2008, when the New York Fed extended an $85 billion emergency loan and took an 80 percent stake in the company. The recent collapse of Lehman Brothers investment bank had left markets reeling, and AIG was teetering on the edge of bankruptcy, largely because of a troubled portfolio of exotic financial derivatives written by a subsidiary. That bailout eventually grew to the figure of more than $180 billion, though the company's actual tab has decreased over the past year.
Shares of AIG closed Thursday at $39.10, up more than 4.41 percent for the day.