AIG to close Fed loan balance as U.S. takes step toward recouping taxpayer funds
Thursday, January 13, 2011; 8:13 PM
The federal government on Friday is poised to take a major step toward recouping the massive taxpayer investment in American International Group as the long-troubled insurance giant moves closer to regaining its independence.
In a complex transaction nearly a year in the making, the Treasury Department plans to convert its preferred shares in the company into nearly 1.7 billion shares of common stock, giving the agency a 92 percent stake in AIG that it hopes to sell over the next two years.
If the company's stock continues to perform well, the government stands to make billions on its AIG investment over time. Of course, those profits could evaporate should the company's stock falter.
Also Friday, AIG will tap the proceeds from its sale last year of American Life Insurance Co. (Alico), as well as from its October public offering of Asia-based AIA Group, to satisfy the balance of the $85 billion emergency loan from the Federal Reserve that saved the company from collapse in late 2008.
"We anticipate that we will be able to deliver on our promise to the American people to repay the extraordinary assistance they provided to AIG during the financial crisis," AIG chief executive Robert H. Benmosche said in a statement this week, ahead of Friday's planned closing. "We remain grateful for their support of AIG, and we remain convinced that the American people will realize a profit on their investment in our company."
If the plan unfolds smoothly Friday and over the coming months, it would represent a reversal of fortunes - both for a company that had become a target of national scorn at the height of the financial crisis, and for taxpayers who long ago had written off the government's investment in the company as a lost cause.
"AIG has been an amazing story. It has gone from being demoralized, with seemingly insurmountable problems," to a more viable company, said Rob Haines, an analyst for CreditSights. "For the taxpayers and for AIG, it is a good thing. . . . It puts into place the plan for the government to ultimately exit the company."
The current AIG is a smaller, less risky version of the behemoth that nearly collapsed in 2008. It has sold various units in addition to AIA and Alico, wound down the most troublesome portfolios within its financial-products unit and sold its New York headquarters building.
It has become primarily an insurance company again rather than a sprawling financial conglomerate, relying on core businesses such as Chartis, the international property and casualty arm, and SunAmerica, a domestic life insurance company that also offers retirement products.
The expected conversion of Treasury's preferred shares on Friday will dilute the company's current shareholders. To compensate them, the AIG board voted to give those investors warrants that entitle them to purchase shares of AIG stock at $45 each.
The Treasury could begin to offload its stock as early as March, and agency officials this week received pitches from banks such as Morgan Stanley, J.P. Morgan and Bank of America, which are hoping to underwrite what could be a lucrative deal.
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 last year in unwinding its bailout of Citigroup.