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.