Counterparties: Privatizing AIG
Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com
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: