Up until recently, the massive $180 billion bailout of AIG was
considered a sunk cost. Few predicted the floundering insurance giant
would repay the government, much less generate a profit for Uncle Sam.
But now, AIG and the government have reached a deal
that could "return a profit to taxpayers." Is that really possible?
Here are the details of the plan followed by analysis from financial
- How Will AIG Pay Everything Back? Melly Alazraki at Daily Finance explains the details:
the New York Fed has been paid in full, the U.S. Treasury will exchange
the $49.1 billion in AIG preferred shares it holds due to the TARP
bailout for approximately 1.655 billion shares of AIG common stock. In
addition, AIG will issue up to 75 million warrants with a strike price
of $45 per share to existing common shareholders. After the exchange,
the Treasury will own 92.1% of the common stock of AIG, but will then
sell its stake on the open market over time.
First, though, AIG
expects to repay the entire $20 billion it borrowed from the New York
Fed under the senior secured credit facility. It plans to do so with its
own resources, as well as with funds raised through the sale of assets,
including the initial public offering of its Asian life insurance
business, American International Assurance Company, and the pending sale
of its foreign life insurance company, American Life Insurance Company,
to MetLife (MET)
- This Exit Deal Is Worth a Try, writes Felix Salmon
at Reuters: "I’m not convinced that the US will ultimately get paid
back all the money it lent to AIG — and it certainly won’t be paid back
with a level of interest commensurate with the amount of risk involved
in the deal. It’s one thing to look at the value of the small number of
AIG shares in free circulation; it’s something else entirely to assume
that the government will be able to sell tens of billions of dollars’
worth of its own shares at anything like the same level. But it’s
certainly worth a try. So long as the stock market continues to place a
significant positive value on the company, it would be foolish of the
government not to."
- Wrong—Taxpayers Are Not Getting Compensated,
insists Yves Smith at Naked Capitalism: "Let’s not kid ourselves: all
this fancy financial footwork is to divert public attention from the
fact that AIG will deliver big losses to the taxpayer. The latest Congressional Oversight Panel report
contained estimates of losses on the AIG financing, with estimates from
separate government sources ranging form $36 to $50 billion. Do you see
this acknowledged ANYWHERE in the New York Times, Bloomberg, or Wall Street Journal? (To its credit, the FT does pick this up). No, which means this propagandizing, sadly, is proving to be quite effective."
- This Could Work, contends Dan Indiviglio
at The Atlantic: "It's conceivable that the Treasury could get its
money back -- or even make a profit. It would depend a lot on AIG's
performance between now and when the government begins to sell its
stake. If the Treasury sells those shares for more than $29.67 per share
(which is plausible as the stock is currently trading around $38), and
if AIG is able to pay back the full $22 billion in preferred shares,
then the Treasury will be made whole."
- No Reason to Celebrate Regardless, writes The Economist: "One insider suggested to the Wall Street Journal that the government could turn a profit if its shares can be sold for more than $30 each.
That looks doable (assuming the calculation is correct). It does not,
however, take account of the huge amounts of indirect support that
AIG—and the rest of the financial system—has received since 2008. From
the public’s perspective, the outcome will likely be much better than
originally feared. But hardly cause for celebration."
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