Tags: $AIG, Bailout, Bank of America, Banks, Government, Government Loans, JPMorgan Chase, TARP

AIG and Government Looking to Accelerate Exit Strategy

By , Contributing Writer, Money Morning •

Government officials are huddling with executives from American International Group Inc. (NYSE: AIG) to hatch a scheme to accelerate the company's plan to regain its independence and repay in full what the insurer owes U.S. taxpayers, according to a report from The Wall Street Journal.

Under the plan, the Treasury Department is likely to convert $49 billion of AIG preferred shares it holds into common shares, a move that could bring the government's ownership stake in AIG to above 90%, from 79.8% currently, The Journal reported, citing sources familiar with the matter.

The common shares would then be gradually sold off to private investors, a move that would reduce U.S. ownership and potentially earn the government a profit if the shares rise in value.

If successful, an exit would be seen as a victory for the government and the company. Most large banks, including JPMorgan Chase & Co. (NYSE: JPM) and Bank of America Corp (NYSE: BAC) have repaid their government loans in full.

More recently, automaker General Motors Corp. has begun the process of getting out from under its government debt with an initial public offering planned for later this year. About $200 billion of the $386 billion that the Treasury invested in banks and automakers over the past two years has already been repaid, The Journal said.

The government rescued AIG from the brink of collapse two years ago this week. More than $120 billion of taxpayer funds are still outstanding, including loans of $20 billion to the Federal Reserve Bank of New York and $49 billion AIG received from the Troubled Asset Relief Program (TARP).

But a successful exit and repayment plan is likely to span several years and remains far from certain. The company first must convince investors it can generate significant profits from its core insurance businesses, which consists mainly of global property and casualty operations and a U.S. life insurance and retirement services business. AIG projections call for it to produce $6 billion to $8 billion in annual earnings.

"Our objectives remain the same: to repay taxpayers and position AIG over time as a strong, independent company worthy of investor confidence," an AIG spokeswoman told The Journal.

AIG and federal officials will lay out the details of the government's exit strategy to investors in the coming weeks. The aim is to provide investors with a road map that will help them get a clearer idea of AIG's value, enabling the company to issue new stock in the coming months.

The market value of AIG stock held by investors is currently about $5 billion, down from over $100 billion in early 2008 before the bailout.

AIG will start the process by repaying the New York Fed, its largest and most-senior creditor, by selling assets estimated to be worth over $40 billion.

AIG expects to close a $15.5 billion sale of its American Life Insurance Co. insurance unit to MetLife Inc. (NYSE: MET) in the fourth quarter.

It also hopes to raise $15 billion to $17 billion in cash from a Hong Kong initial public offering (IPO) of AIA Group Ltd., its Asian life insurance unit. After AIA is listed, AIG could sell more shares in the unit through additional offerings. AIG's deal to sell the unit to Prudential PLC for $35.5 billion was voted down by the U.K.-based insurers' shareholders in May.

After its major asset sales are complete and the Fed is largely paid back, AIG can turn to repaying the Treasury, which is when the conversion from preferred to common stock will be initiated.

"AIG does not have enough cash to pay back the Treasury. As a result, there's no choice for the government but to position itself to sell off its interest to the private sector," Angelo Graci, an analyst at Chapdelaine Credit Partners in New York told The Journal.

AIG is the biggest recipient of government aid from the 2008 financial crisis and has been a lightning rod for critics who have questioned government officials' decision to save it with a $180 billion bailout.

A Congressional Budget Office report in March said AIG's ability to repay the bailout funds is an open question and that as much as $36 billion in assistance provided to the company since the start of the financial crisis may never be repaid.

"When AIG will be able to pay the government completely back for its assistance is currently unknown because the federal government's exposure to AIG is increasingly tied to the future health of AIG, its restructuring efforts, and its ongoing performance as more debt is exchanged for equity," the report said.

The Congressional Oversight Panel, created to oversee TARP, said in June that it is unclear if AIG can generate enough value for shareholders to ensure the U.S. gets repaid in full, concluding that taxpayers "remain at risk for severe losses."

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