AIG still needs charmed future to repay taxpayers
By Lauren Silva Laughlin and Richard Beales
The role of Treasury Secretary Tim Geithner in the $180 billion bailout of American International Group is under scrutiny in Washington. Yet whatever the outcome of Wednesday’s hearing of the House Oversight Committee, AIG still owes American taxpayers some $124 billion.
The company is making progress on asset sales. But to repay its rescuers in full, it still needs a charmed future.
As of December, AIG owed the New York Federal Reserve around $17 billion in debt, plus another $25 billion that was converted into preferred equity stakes in two AIG subsidiaries, American International Assurance (AIA) and American Life Insurance (Alico). The Treasury has also sunk $45 billion from the Troubled Asset Relief Program into AIG preferred stock.
On top of all that, the New York Fed provided another $44 billion or so to buy debt securities from AIG. Those now reside in separate vehicles called Maiden Lane II and Maiden Lane III — the latter being the source of the controversial payments made to AIG trading partners including Goldman Sachs. The amount those vehicles still owed the Fed was $37 billion in September.
AIG is in discussions to sell Alico to MetLife for up to $15 billion. That’s more than enough to repay the New York Fed’s $9 billion preferred stake. It’s good news that a chunky asset sale may finally be happening. It suggests the $16 billion of government money associated with AIA may in time be recouped, too — though talk that AIG may have given up trying to sell its big aircraft leasing unit is a reminder that such sales aren’t easy to accomplish.
Meanwhile the mortgage-backed securities, collateralized debt obligations and the like held by the Maiden Lane vehicles have risen in value with improving financial markets. A Jan. 21 report from the New York Fed gave a September valuation for the combined portfolio holdings of $38 billion, and markets have strengthened since. The vehicles may now even be sitting on paper profits, suggesting there’s a decent chance they will repay what they owe.
Then there’s the New York Fed’s $17 billion in debt. That’s on AIG’s balance sheet and, with the company’s business apparently stabilizing, there’s a reasonable chance that, too, will be paid back eventually.
So far, so good — and markedly better than things appeared even a few months ago. There’s even a chance that taxpayers get all their money back.
After all, AIG’s market capitalization — assuming the government takes up the 79.9 percent ownership to which it is entitled — is currently some $18 billion. Since the $45 billion of TARP preferred stock is higher in the pecking order than common shares, it suggests stock market investors think there is value left even after repaying the TARP investment. Looked at another way, AIG’s reported book value, or assets less liabilities, was $73 billion at the end of September. That covers the TARP investment more than one and a half times.
But it’s not as simple as that. First off, Sanford Bernstein attaches a probability of 60 percent to a scenario where AIG’s common equity ends up worth nothing. That could happen if, say, the government stops backing the company — and would mean taxpayers’ TARP money wasn’t coming back in full. And the research firm also reckons AIG has undershot what it needs in its insurance businesses’ loss reserves by around $11 billion, suggesting it could suffer unanticipated writedowns in the future.
Even without such problems, the rosy scenarios only deal with valuations on paper. Turning these into cash isn’t straightforward. The government’s support for AIG figures in investors’ calculations of value; and if it did sell over a short period, its holdings are so massive that it could easily tank market prices. The same applies to the securities held in Maiden Lanes II and III.
To be sure, AIG’s prospects of repaying the government are better than they were. But financial markets will have to continue playing ball. Alico would be a start: hard cash will flow back to taxpayers. But there will still be some $115 billion to go. Markets will need to cooperate for a long time before that can be repaid.