US Treasury exits AIG as markets await rebound

December 12, 2012

A woman stands in front of an AIG logo in Tokyo in this March 3, 2009 file photo. — Reuters picA woman stands in front of an AIG logo in Tokyo in this March 3, 2009 file photo. — Reuters picNEW YORK, Dec 12 — The US Treasury’s sale of its remaining stake in American International Group Inc will leave taxpayers with a profit of nearly US$23 billion (RM69 billion) — more than the next three most successful bailouts combined.

The government’s profit on the deal is a turnabout from what was one of the most reviled bailouts of the financial crisis.

The 2008 rescue later spurred a senator to suggest top executives at the insurer consider suicide. The Government Accountability Office at one point suggested there was a real chance taxpayers would never be repaid in full.

Yet they were, with US$22.7 billion in total returns, including the proceeds of the sale Treasury launched Monday night, AIG said. The government provided AIG with some US$182 billion of support.

“Thank You — We Did It,” AIG Chief Executive Robert Benmosche wrote in a memo to AIG staff yesterday. “Today warrants a celebration like no other in AIG’s history and places well in the past a crisis none of us will ever forget.”

Even with the windfall, the government will likely lose money on its Troubled Asset Relief Programme, the US$700 billion bailout launched in the darkest days of the crisis. Banks and auto companies still owe taxpayers tens of billions of dollars.

The Treasury said its sale of about 15 per cent of AIG’s stock would fetch US$7.6 billion, after it sold 234.2 million shares to investors for US$32.50 each. (The Treasury also has warrants it can sell to boost the government’s profits down the line).

AIG shares rose 4.6 per cent to US$34.89.

Huge debt remaining

Even with the profit on AIG, US$38 billion in TARP funds have yet to be recovered, the Treasury said.

According to the latest monthly report to Congress, some 237 banks still owe money under the Capital Purchase Program. While that specific programme is now profitable, the larger shortfall for the whole program remains.

The biggest part of the shortfall is with the Automotive Industry Financing Programme, which disbursed funds to General Motors, Chrysler and Ally Financial. That facility disbursed US$79.8 billion in funds and has recovered US$40.9 billion through the end of November.

Technically speaking, TARP will also take a loss on AIG. Though as a whole the AIG bailout was profitable, the specific block of shares acquired with TARP money came at a price well above where that stock was ultimately sold.

To many, though, it is a distinction without a difference.

“It was an ugly process,” said Greg Valliere, chief political strategist with Potomac Research Group, but he added: “Bottom line is that the government made money.”

Thoughts of suicide

AIG was rescued just before it would have been forced to file for bankruptcy as losses on risky derivatives mounted. It was bailed out as the financial system stood at the brink of disaster, shortly after Lehman Brothers filed for bankruptcy and Merrill Lynch sold itself to Bank of America.

AIG was one of the Treasury Department’s most hotly contested bailouts. US lawmakers began calling for Treasury Secretary Timothy Geithner’s resignation after it was revealed the insurer paid US$165 million in retention bonuses to employees of the derivatives unit that has been blamed for the company’s financial distress at that time.

It prompted Republican lawmaker Charles Grassley to call for AIG executives to resign or commit suicide, though the Iowa senator eventually backtracked from those comments.

The company also funnelled more than US$90 billion of taxpayer money — more than half the funds the government used to rescue AIG — to various European and Wall Street banks, including Goldman Sachs, Deutsche Bank and Barclays Plc.

Done with asset sales

With the bailout at an end, though, the company’s asset sales may also be over.

“At this point there aren’t many pieces that are left. You have the company you expect to have in the long term,” Sandler O’Neill analyst Paul Newsome said.

The company, which consists of its core US life, global property and casualty, and US mortgage insurance units, will now have to focus on turning around earnings at the property and casualty business, formerly known as Chartis.

That business has higher loss ratios than its peers and has been increasing premiums, as it and the rest of the industry grapple with large catastrophe losses.

Last week, AIG said it would contribute US$1 billion to its US property subsidiaries to help cover the US$1.3 billion loss it expects from Superstorm Sandy.

“This is an investment opportunity. They are trading at a larger discount to book value than peers and we see them getting to book value in a couple of years,” Sanford C. Bernstein analyst Josh Stirling said.

AIG trades at half of its book value, compared with property and casualty peers Travellers Co and Chubb Corp which trade above book value, according to Thomson Reuters Starmine.

The Treasury share sale was jointly led by Bank of America Merrill Lynch, Citigroup, Deutsche Bank, Goldman Sachs and JPMorgan Chase & Co. — Reuters 

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