Uncle Sam’s AIG exit likely to be drawn out

September 28, 2010

There’s no quick way for the U.S. government to exit American International Group <AIG.N>. Converting $49 billion of preferred stock to common shares and selling them would, like the government’s exit from Citigroup <C.N>, take a while. And that’s assuming other share sales, needed for separate repayments relating to AIG, go smoothly.

As of June 30, AIG owed the government just over $100 billion — though a further $4 billion has since been repaid. AIG has also made progress offloading assets. Big examples include the IPO of AIA, the Asian unit currently expected to debut on the Hong Kong market in the next month or so, and the $15.5 billion sale to MetLife <MET.N> of American Life Insurance, or Alico, which is winding its way towards closing. The New York Fed converted debt into preferred shares in these entities worth $16 billion and $9 billion, respectively, and the deals will help pay that off.

Back at AIG itself, there are around $49 billion of preferred shares owned by the Treasury. The Citi example shows how that block of prefs might be swapped into common equity and then sold, over time. In the Citi case, the government is turning a profit on its shares, potentially making the idea interesting for AIG as well.

But it looks like selling the government’s Citi stake — initially nearly 30 percent — will take longer than the anticipated nine months from March. Offloading the Treasury’s stake in AIG could take far longer, because the government already effectively owns 80 percent of the company, and converting the prefs could take that nearer to 90 percent.

Unfortunately, that’s not all. A planned sale of AIA to the UK’s Prudential <PRU.L> — abandoned in June — would have brought in a big slug of cash, but an IPO probably won’t raise enough to pay back the New York Fed’s preferred interest in AIA right away, let alone give AIG any proceeds to apply to its own obligations. Meanwhile the Alico sale will come with only $6.8 billion of cash. So the government will depend on further sales of AIA and MetLife equity interests to get its money back.

And there’s more. Ahead of all that, at least in strict credit priority, is another $20 billion-odd, including accrued interest, that AIG still owes the New York Fed under a credit facility. The insurer might at some point be able to refinance that. But put the pieces together, and taxpayers could wait a long time before enough shares in enough different companies are sold for them to be made whole.

Comments

Good post. A welcome antidote to the credulous drivel most of the media put forth when the Treasury issued its press release.

Posted by DavidMerkel | Report as abusive
 

Being—soon to be—ex AIG division employee..I know the bail out was WRONG…stupid…moronic…NOT the way things work..
anyway…does these people–CAREER politicians even know how to balance a ck book?? but the point is—anyone ever raise a simple question..GOOGLE >> taxes we pay

Posted by rgw | Report as abusive
 

one comment on AIG—even GREENBURG said it was wrong and not needed…end of story…

Posted by rgw | Report as abusive
 

I have been puzzling over how a AIG is supposed to pay us back. As you mentioned, we already own 79.9% of the company. So the company converts $49 billion owed to the Treasury into common shares, and we now own 90%. So are we to believe that $49 billion equals 10% of the value of the company? That puts the valuation of the company at $490 billion. I don’t think so. The market capitalization as of the close of business today is $25 billion. And imagine how that would go down if the 80% of the shares that the government now owns went to the market with a sell order. It would make the flash crash back in May look like a picnic. Face it, Timmy and Bennie, they broke it, now we’re stuck with it.

Posted by bff426 | Report as abusive
 

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