AIG files plan to pay off debt to New York Fed, prepare for Treasury stock swap

Dec. 8 (Bloomberg) -- American International Group Inc. struck a deal to repay its Federal Reserve credit line as the insurer seeks independence from the government. AIG owed about $21 billion last week on the line, which was created in 2008 after regulators said a failure of the insurer would hobble the global economy. Bloomberg's Carol Massar, Matt Miller, Dominic Chu, Adam Johnson and Julie Hyman report. (Source: Bloomberg)
By Brady Dennis
Washington Post Staff Writer
Wednesday, December 8, 2010; 9:35 PM

Insurance giant American International Group on Wednesday formalized plans to pay off its debt to the Federal Reserve Bank of New York and set the stage for the Treasury Department to sell a significant portion of its stake in the firm early next year.

The company said in a regulatory filing that it will use profits from the recent sale of American Life Insurance, as well as from its October public offering of Asia-based AIA Group, to satisfy the balance of the emergency loan that saved AIG in late 2008.

The sale of Alico and the AIA public offering generated approximately $27 billion for the company, eclipsing the $20 billion it still owes the New York Fed.

AIG said in a statement that the move, the outline of which had been detailed earlier this fall, "marks an important step forward in our progress toward completely repaying the taxpayers."

In satisfying the New York Fed loan, AIG also clears the way for the Treasury to begin to recover its massive investment in the global insurer. According to Wednesday's filing, when the deal closes in coming weeks, the Treasury will swap its preferred shares in the company, worth about $49 billion, for nearly 1.7 billion shares of AIG common stock.

That transaction will leave the federal government with a 92.1 percent ownership stake in AIG, up from its current stake of 79.8 percent. According to the filing, the Treasury also will maintain "complete control" over the terms of any stock sales until its stake falls below 33 percent.

The deal paves the way for a potential public offering next spring in which the Treasury could sell off a sizable portion of its shares in the company.

Officials at both Treasury and AIG cautioned Wednesday about any preliminary figures about how much the government might seek to sell early next year, saying much will depend on the market and on the performance of AIG's stock between now and then.

"We hope to be able to go to the market with a public offering of AIG this spring, but we have work to do to make that happen," AIG spokesman Mark Herr said. "We are working as diligently as we can to achieve this as quickly as possible, subject to market conditions."

Added Treasury spokesman Mark Paustenbach: "We are making good progress on the recapitalization plan, but it is premature to speculate about next steps."

Still, recent history suggests that officials will seek to recoup taxpayer money and unwind U.S. ownership of AIG as soon as possible. Earlier this week, the Treasury moved to sell its remaining 2.4 billion shares in Citigroup, a deal that largely ends the government stake in that company and will result in a $12 billion profit.

Last month, the Treasury nearly halved its 61 percent stake in General Motors when the bailed-out automaker returned to the stock market. The government must wait at least six months before selling more GM stock; it remains unclear if the Treasury will break even on that investment.

Regardless, officials seem increasingly certain that taxpayers will recoup their investment in AIG - an outcome that seemed highly unlikely last year, when the total government commitment to the troubled company peaked at more than $180 billion.

"When all is said and done, we believe taxpayers will recover every dollar invested in AIG and stand a good chance of making a profit," said Tim Massad, Treasury's acting assistant secretary for financial stability.

Shares of AIG closed Thursday at $42.22, down nearly 4 percent on the day.

© 2010 The Washington Post Company