The U.S. government, for the first time since 2008, is officially a minority stakeholder in American International Group Inc. (NYSE: AIG), with an $18 billion stock sale that made money for taxpayers.
The AIG stock sale will reduce the government's stake in the insurance company to about 22% from 53%.
The U.S. Treasury Department announced Sunday it was selling a large chunk of shares in the bailed-out insurer. The government saved AIG in 2008 and 2009 with a bailout package that totaled around $182 billion.
Including Monday's sale and money from AIG, the Treasury claims it has recovered a total of $197.4 billion from AIG – a $15 billion profit for taxpayers.
It's not surprising the government is selling AIG shares. What is unexpected is that such a large chunk of AIG stock will be released into the market at once, instead of spaced out over time.
One reason to shed the stock faster than planned is to credit U.S. President Barack Obama with taxpayer profit ahead of a tight race for the White House.
White House Press Secretary Jay Carney said Monday, "We have been committed to exiting those investments as quickly as practicable. What it does demonstrate is an ongoing commitment to recover taxpayer money. It's safe to say the president is pleased with the progress being made as we wind down these investments."
But even with a multi-billion dollar profit, defending private-sector bailouts is an impossible sell to most voters.
AIG Stock Sale Becomes Election 2012 Fodder
The announcement of the Treasury's plan to cash out comes as President Obama seeks a second term and has been forced to defend his support for using taxpayer money to rescue flailing companies during the financial crisis.
Reducing the government's stake in AIG below 50% and eventually severing the ties has long been a goal of both AIG and the Obama administration. The Obama administration has been unloading positions in the politically ostracized financial crisis programs as Election 2012 approaches.
The latest sale appeared as the Republican camp hits the campaign trail questioning the merits of the pricey bailouts under President Obama's term. Fresh polls reveal that Romney has an edge when it comes to who voters believe is better equipped to get the ailing U.S. economy moving again.
GOP presidential hopeful Mitt Romney has delighted in pointing out that President Obama has not made good on his promises. Romney recently reiterated his message that the United States is no better off than it was four years ago when the president took office.
President Obama has tried to defend the U.S. bailout packages doled out during and after the financial crisis, and AIG will now become the poster child for successful government intervention.
"Taking action to stabilize AIG during the financial crisis was something the government should never have had to do, but we had no better option at the time to protect the American economy from the damage that would have been caused by the company's collapse," Treasury Secretary Timothy F. Geithner said in announcing the profit, adding that "to stabilize and then restructure the company with a very substantial positive gain for the American taxpayer is a significant accomplishment."
But Geithner added that putting taxpayer money toward saving the private sector shouldn't become habit.
"We need to continue the critical task of implementing Wall Street reform so that the American economy is never put in this position again," said Geithner.
While the AIG bailout worked out better than predicted, taxpayers are still out billions of dollars. The government has recouped $342 billion out of $411 billion disbursed to financial institutions through the most prominent bailout, the Troubled Asset Relief Program, or TARP. But more than 300 small banks that received TARP funds have yet to repay taxpayers.
AIG Bailout Not Typical
The U.S. government became AIG's majority shareholder in 2008 when the esteemed insurer was severely saddled down with hordes of debt that evolved from a roster of risky deals and bets that had gone bad.
The government came to its rescue and acquired AIG's toxic assets, upsetting many investors and taxpayers who didn't like the idea of the government playing with their money to bailout irresponsible or overleveraged companies.
AIG was originally deemed to fall into the unprofitable category, but under the helm of CEO Robert H. Benmosche, the insurer has made great strides to turn itself around and return to profitability. The large share repurchase is another signal of its renewed strength.
"The government's looking to get rid of all their shares," Jim Leonard, an analyst at Morningstar Inc., told Bloomberg News. "They've been dinged up so bad, and for a value investor, they're at a good level."
AIG purchased $5 billion worth of shares. The underwriters exercised their options to buy 83.1 million shares at $32.50 apiece.
But the AIG profit isn't going to set a precedent for the result of other government bailout packages.
The government still has its hands messed up in several other corporate rescue bailouts that are expected to be largely unprofitable. That includes a one-third stake in General Motors Co. (NYSE: GM) and about three-quarters of Ally Financial, plus the struggling mortgage giants Freddie Mae and Freddie Mac.
Related Articles and New:
- Money Morning:
Ugly August U.S. Jobs Report Made Romney's Day
Government to Sell Controlling Interest in Bailed-Out AIG
- International Business Times:
US Will Cut Its AIG Stake to 23% to 53%, By One Estimate
- CNN Money:
AIG closer to being out of government hands
US Treasury to Sell $18 billion in AIG
- The New York Times:
Treasury to Cut A.I.G. Stake Below 50%
AIG shares fall on planned $18 billion sales of Treasury's share