Counterparties: Privatizing AIG

September 10, 2012

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On August 23, the NY Fed successfully unloaded the last of its toxic AIG mortgage-backed securities. Now, the US Treasury is selling $18 billion of its AIG shares to the public, with an additional $2.7 billion available to cover investor demand. (Citi, Deutsche Bank, Goldman and JPMorgan are carrying Uncle Sam’s water as joint global coordinators.)

The sale will bring the government’s stake down from 53% to as low as 15%, as Damian Paletta, Erik Holm and Serena Ng write in the WSJ:

A near-exit by the government from one of the most controversial bailouts is both a significant accomplishment for the Obama administration and a sign of how far the markets have come in four years, thanks in part to the rescue of financial companies and the Fed’s efforts to support the economy by reducing interest rates.

But the sale could also renew complaints that Treasury still hasn’t outlined a concrete strategy for exiting other large financial-crisis investments… The government remains in the red on its investments in Fannie and Freddie, which have received $188 billion in taxpayer support. The US continues to hold sizable stakes in General Motors and Ally that it spent $68 billion on and may not fully recover.

As Jesse Eisinger noted last month, Treasury has been offloading shares in small banks by selling them back to the banks themselves, often at a discount. That trending is continuing, albeit in a different structure, with Treasury also announcing today it will sell shares in four small banks.

Dealbook’s Michael de la Merced notes that the “offering will take place during the heat of the electoral campaign, as the president seeks to defend the use of taxpayer money to save financial institutions like AIG”. Markets and AIG’s increasing financial stability also make the case for the Treasury’s timing. The S&P 500 is at its highest point since 2008, and even though AIG shares predictably slid on the news, they’re still up almost 45% this year. The company’s second quarter earnings were nearly double consensus as profit increased 27%; on top of that, it has managed to squirrel away $5 billion in cash to buy a portion of the government’s offering.

At $33 a share, the government will claim a profit from its overall break-even price of $28.73. The government will also be a significant step closer to putting the whole AIG episode, which in total amounted to some $182 billion in bailout funds, behind it. AIG can get back to more routine matters, like worrying about its soon-to-be regulator. — Ben Walsh

On to today’s links:

Must Read
Why health care matters and our current debt does not – St Louis Fed

Paul Graham on why startup investing is like “Black swan farming” – Paul Graham

Rogoff: Financial reforms have “mostly served as a patch to preserve the status quo” – Guardian
Because what we really need is slower, more deliberative financial reform – NYT

Popular Myths
“Everything people think they know about the stimulus is wrong” – WaPo

JPMorgan, Citi searching for the most politically palatable way to overpay their execs – WSJ

EU Mess
Angela Merkel is now suddenly willing to rescue Greece at all costs – Der Spiegel
The “cold douche begins” for Draghi’s bond plan – The Telegraph

New Normal
The “new oil well”: collecting the $1 trillion in outstanding student loan debt – NYT

Financial Arcana
“Spoilsport bank regulators ruin another derivative that was too beautiful to live” – Matt Levine

Who would be left out of Romney’s pre-existing conditions plan? 89 million people – WaPo

The genealogy of New York City pizza – Braiker

Small businesses created “essentially zero” jobs in August – WaPo

The iPhone 5 could add half a point to 4th quarter GDP, JPMorgan says – JP Morgan

Tim Geithner posted a respectable triathlon time this Sunday – WaPo

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