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AIG Share Sale Nets US Government $15bn Profit On Bailout « Back
Selina Harrison, October 2012
The US Treasury has become a minority shareholder in insurer American International Group Inc (AIG) after selling $20.7bn of remaining stock it held following the company’s 2008 government bailout. The sale means the government has now recouped a total of $197bn from the company – a $15.1bn profit on the $187.3bn initially pledged by the US Treasury and the Federal Reserve. Priced at $32.50 apiece, on 10 September, the Treasury sold 553.8 million shares in AIG which it bought for $5bn. Although the US Treasury remains AIG’s biggest shareholder, the share sale has reduced its ownership of AIG’s common equity from 53.4 percent to 21.5 percent.

AIG, once the world’s largest insurer, was bailed out at the height of the worldwide credit crunch. In an attempt to thwart the deepest financial crisis since the Great Depression, at the time the US government and central bank spent, lent or committed as much as $12.8 trillion to bolster financial firms and automakers. “Taking action to stabilise AIG during the financial crisis was something the government should never have had to do, but we had no better option at the time to protect the American economy from the damage that would have been caused by the company’s collapse,” said Treasury Secretary Tim Geithner.

“To stabilise and then restructure the company with a very substantial positive gain for the American taxpayer is a significant accomplishment. We need to continue the critical task of implementing Wall Street reform so that the American economy is never put in this position again.”

AIG ran into trouble as a result of its exposures to the credit default swaps market and its bailout was part of the Troubled Asset Relief Program enacted under President George W. Bush. Due to concerns that AIG’s collapse would harm companies around the world, as well as cause chaos in the credit default swaps market, the US government felt it had little choice in the matter than to rescue the insurer. It pledged $182bn to keep AIG afloat and, although AIG did not tap the full amount, the loan came at the price of a high interest rate, government authorisation to veto any dividends, and the condition that AIG divest assets to help repay the loan. Had the federal government left AIG and its subsidiaries to collapse, taxpayers in the US would have been forced to absorb over $1bn in costs.

As a result of the bailout, the federal government controlled almost 80 percent of AIG. Since then the treasury has conducted a series of share sales of AIG stock: the first pair of offerings were priced at $29 a share, and the second pair at $30.50, raising about $23.3bn. The new sale means the US has, for the first time since AIG’s rescue, relinquished majority control of the company. Robert Benmosche, AIG’s chief executive officer, has been buying back stock to help AIG regain independence and increase the value of remaining shares. He has also raised funds for repurchases by divesting assets including most of its stake in Hong Kong-based insurer AIA Group Ltd.

With the Treasury stake below 50 percent, the Federal Reserve will become the company’s primary regulator. As such, equity investors in AIG will now face the possibility that the company’s new supervisor will not be as generous when it comes to dividends, stock buybacks and certain profitable yet risky business activities.

On news of the share sale, AIG’s stock fell 2 percent to $33.30 in New York trading. Even so, company stock has increased by around 37 percent this year. AIG trades for about 55 percent of book value, a measure of assets minus liabilities, and has returned to profitability this year. Indeed, at the beginning of August, AIG reported a second-quarter profit of $2.3bn, 27 percent more than a year earlier and much higher than expected.

Though AIG still owes the US Treasury about $2.6bn from the bailout, Treasury profits are likely to rise when it sells the rest of its stake in the insurer. Indeed, the Treasury will make a further $2.7bn of shares available for buyers over the next month to cover additional demand. Furthermore, the US Treasury’s remaining stake of 317 million shares was worth $10.3bn at the offering price. “I think that it’s safe to say that the president is pleased with the progress being made as we wind down these investments and recover taxpayer money,” said Jay Carney, White House press secretary.

Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc. and JPMorgan Chase & Co. managed the offering, the Treasury said. Underwriters have a 30-day option to buy as many as 83.1 million additional AIG shares from the Treasury, according to the statement.

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