Insurance giant AIG this week outlined an agreement with the Federal Reserve Bank of New York to repay all of its bailout funds to the regulator, which first extended the company a lifeline in September 2008.
This becomes the latest step the New York-based insurer, which was bailed out by the Fed and the Department of Treasury in 2008 to avoid a systemic collapse of the global financial system, to repay all of its obligations and return funds to U.S. taxpayers.
In the agreement, AIG would use its proceeds from the sale of two Asian subsidiary businesses as well as its line of credit from the U.S. Treasury to pay down its loan from the Fed, which totaled around $20 billion as of last week, according to the company.
The recapitalization would in turn increase Treasury ownership from 79.9 percent to 92 percent of the company.
“Our filing today [with the Securities and Exchange Commission] that we have signed the definitive recapitalization agreement with the government marks an important step forward in our progress toward completely repaying taxpayers,” said AIG Chief Executive Officer Robert Benmosche, an industry veteran and former chief of MetLife.
“We remain committed to executing the steps and meeting all conditions in the agreement as soon as possible,” he continued.
The insurer remains one of the last large corporations yet to fully repay its government obligations. At one point, AIG owed $182 billion to the U.S. government, after a series of bailouts.
Last month, Detroit-based automaker General Motors filed for an initial public offering of stock and drastically reduced its government ownership. Earlier in the week, the Treasury sold its remaining 2.4 billion shares of stock in banking giant Citigroup Inc. The U.S. government made a profit of $12 billion in its Citigroup investment.
The bailouts given to the private sector, part of the government’s $700 billion Trouble Asset Relief Program (TARP), were highly controversial and criticized by many lawmakers. Firms from the financial and automotive industries received government bailouts in 2008 and 2009.
AIG’s bailout remains one of the most controversial. At the height of the crisis, the company was considered a scapegoat for Wall Street’s excesses during the boom years as its financial services arm underwrote billions of dollars worth of derivative contracts, or toxic financial instruments that some analysts said exacerbated the financial crisis.
In 2009, AIG was again making headlines due to millions of dollars worth of bonus payouts, many of which were unable to be shed because the bonuses were contractual obligations, and due to the nature of the bailouts, AIG was not qualified to tear the contracts in a bankruptcy proceeding.
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Exiting Treasury Ownership
On Wednesday, AIG also struck a deal with the Treasury Department to subsequently lower its stake from 92 percent to around 70 percent of the company.
The plan enables the Treasury to sell a portion of its ownership in AIG in a major stock offering, enabling AIG to both repay its Fed obligations as well as cut down Treasury ownership.
According to a Reuters report, the offering could be valued between $10 billion and $15 billion, depending on private investor demand. An offering is expected as early as the first quarter of 2011, subject to market conditions and progress in negotiations.
An AIG spokesman said in a statement this week that the company hopes to act on this “as quickly as possible.”
“Today’s announcement is a milestone in the government’s long-stated efforts to exit our investments in private companies as soon as practical while protecting taxpayers,” said Tim Massad, acting assistant secretary for Financial Stability, in a statement this week. “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.”
According to AIG, the Treasury has the right to set terms and conditions of any stock sale until its stake in the company decreases to below 33 percent.
The government, in total, holds an estimated $60 billion in AIG stock, and it must carefully balance the speed at which it sells its shares with consideration for the ability of the insurer to operate as an independent company.
AIG this year has sold its Japanese life insurance business American Life Insurance Company to MetLife, and spun off its Hong Kong-based American International Assurance business in an initial public offering, to raise funds to repay its TARP bailout loans.
Massad argued in the past, echoing the sentiment of Treasury Secretary Timothy F. Geithner, that the U.S. taxpayer would be repaid in full, if not making a profit, in the bailout.
So far this year, shares of AIG are up 40 percent since Jan. 1.
