Taxpayers come second to company in AIG plan

September 30, 2010

American International Group is throwing off its shackles. But taxpayers will be locked in for a while yet. The company’s deal with the government over its $100 billion of bailout funds makes the insurer’s finances simpler and healthier. That’s potentially good for shareholders. But initially the plan largely just rearranges the government’s interests. It is hard to see how it gets taxpayers cash back any sooner, while increasing their risk.

Bob Benmosche, the AIG boss, understandably likes the deal. It will remove the New York Federal Reserve as a senior secured creditor and swap the $49 billion scarlet letter of government bailout preferred shares for common stock. That should allow him to normalize a borrowing relationship with lenders right away and give him more flexibility. As for dealing with the government, the Treasury will take on the remaining New York Fed interests, leaving only one master for AIG to deal with.

Mr. Benmosche is right that the stigma of being one of the holdout recipients of Troubled Asset Relief Program aid as the program winds down wouldn’t be good for credibility. But AIG’s cheerful notion that the plan “provides for full repayment” of taxpayers is premature. Some $20 billion of New York Fed loans will be repaid, but the remaining Treasury interest will be ratcheted down the capital structure. Whether its 92.1 percent stake in AIG ends up being worth enough to repay taxpayers is up to financial markets.

To be fair, the Treasury would be in the money today. And Mr. Benmosche, having improved AIG’s performance, wants to increase its value further. Meanwhile, the government is making money on its sale of Citigroup shares, a precedent that hasn’t gone unnoticed. But selling a less than 30 percent stake in the bank, initially worth some $25 billion, is taking the government longer than originally anticipated. Mr. Benmosche’s suggestion that offloading a far larger stake in AIG may take 18 months sounds optimistic.

Normalizing AIG’s financial situation is a step forward. And the government could make money on its equity stake. However, as investment advisers repeatedly warn, stock prices can go down as well as up. Mr. Benmosche and his colleagues can breathe easier as soon as the plan gets locked in; taxpayers will have to wait.


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Typical. Taxpayers will end up holding the bag again.

Posted by Alex1953 | Report as abusive

Goes to show banks and insurance companies really never lose – they look so some times to lure for more.

I wish government with peoples money being the major stake holder this time, that they don’t rush too much into these lures further.

Posted by Mott | Report as abusive

Two big all-important points left out:

1. Purposed sale of shares at $29 will dilute current shareholders. That’s NOT good for shareholders. That is good for taxpayers.

2. What about the underlying business? Is $39 a share a fair price today? Are you confident in the economy for the next 18 months?

Wall Street will like a slimmed down AIG and their back to basics restructuring. Institutional investors with money on the sidelines will be interested in a 25% discount for such a big block of shares if the business can demonstrate signs of future growth.

Posted by jlawass | Report as abusive

AIG is an example of how Big Business, Large Banks are using taxpayer funds to enrich themselves at the expense of the tax payer.What have we done America?

 “I hope we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial by strength, and bid defiance to the laws of our country.”Thomas Jefferson.

Posted by currywkr | Report as abusive