Treasury deal moves AIG closer to paying back taxpayer money

Washington Post Staff Writer
Friday, January 14, 2011; 4:11 PM

The Treasury Department, the Federal Reserve and American International Group on Friday closed a deal aimed at moving the global insurance giant closer to independence and recouping the massive taxpayer investment that rescued the company in 2008.

Under the terms of the deal, Treasury traded in its preferred AIG shares and now owns 1.66 billion shares of common stock, giving the agency a 92 percent stake in AIG that it plans to sell over the next two years. It also owns approximately $20 billion of preferred equity interests in two AIG subsidiaries.

The government stands to make billions if AIG's share price performs well over time, while any potential profits could disappear if the stock falters.

AIG also on Friday paid off the balance of an emergency $85 billion loan from the Federal Reserve Bank of New York by using 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.

"Today is a very important day that should be viewed as a testament to the unrelenting dedication of terrific people both in the government and at AIG," the company's chief executive, Robert H. Benmosche, said in a statement. "AIG, with the support of countless people, has accomplished a huge goal that many people once thought impossible: completely repaying the Federal Reserve Bank of New York. ... We remain grateful for the extraordinary assistance that taxpayers provided during the financial crisis of 2008, and we continue to believe they will realize a profit on their investment in AIG. ... Today truly marks a new beginning."

Benmosche's confident tone - echoed by government officials on Friday - is not surprising, given changes that have occurred since AIG posted some of the largest losses in U.S. corporate history and found itself the target of national scorn after paying "retention bonuses" to employees at the same division that had nearly destroyed the company.

Since that period, less than two years ago, AIG has whittled itself into a smaller, less risky enterprise by selling many of its key assets and unwinding itself from troublesome investments that prompted huge losses during the financial crisis.

The conversion of Treasury's preferred shares will dilute the company's current shareholders. To compensate them, AIG is issuing warrants to those investors that entitle them to purchase shares of AIG stock at $45 each.

Treasury officials are planning a sizable stock offering this spring - as early as March - with hopes of holding another offering later in the year. 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.

"Treasury welcomes the culmination of AIG's recapitalization plan, which is a vital part of that company's turnaround and puts Treasury in an excellent position to begin realizing value for taxpayers," Treasury Secretary Timothy F. Geithner, who met with Benmosche in Washington on Friday, said in a statement. "Treasury remains optimistic that taxpayers will get back every dollar of their investment in AIG."

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