Insurer American International Group will get up to $22 billion more in U.S. taxpayer funds in a restructuring that will pay off the Federal Reserve in full and allow taxpayers to begin profiting from the firm’s bailout, the Treasury Department said on Monday.
The Treasury reiterated that it expects the government to earn an overall profit on bailout investments in the insurance giant — once as high as $180 billion — assuming the AIG restructuring announced on Sept. 30 is executed.
AIG will draw the $22 billion from remaining Troubled Asset Relief Program funds to repurchase the Federal Reserve Bank of New York’s preferred stock interests in the special purpose vehicles holding two key subsidiaries being sold off, AIA Group Ltd and American Life Insurance Co (ALICO), the Treasury said in a statement. The funds had already been allocated to the AIG rescue program prior to an Oct. 3 moratorium on new TARP spending.
In the restructuring, the assets in the special purpose vehicles will be transferred to the Treasury, liquidating remaining Fed interests in AIG. Paying back Fed loans and preferred stock investments is considered a key step in the company’s ability to stand on its own and earn an investment grade credit rating.
The Treasury said that following the sale of ALICO and AIA’s initial public offering in Hong Kong, it will receive AIG’s remaining shares in AIA and shares in ALICO buyer MetLife Inc. These assets “significantly exceed the amount of the (Fed) preferred investments, and as such, no losses are expected on those preferred interests,” the Treasury said.
Currently, the New York Fed values the AIA and ALICO preferred interests at $26.1 billion — with part of this to be paid down from sale and IPO proceeds.
The bulk of the $20.5 billion in proceeds from the AIA IPO and $7.2 billion in cash from the AIA sale will go to pay off a Federal Reserve credit facility, at a cost of about $20 billion including accrued interest and fees.
AIG on Monday closed the sale of ALICO to Metlife Inc for $16.2 billion, with $7.2 billion in cash and the remainder in stock.
Following the restructuring, expected to be completed by the end of the first quarter of 2011, the Treasury will own 92.1 percent of AIG’s common stock, or about 1.66 billion shares.
Once the restructuring is complete, the Treasury can then begin to sell AIG stock in the open market. It has used a controlled trading mechanism to whittle down its stake in Citigroup , another bailed out financial institution.
Based on Friday’s market closing price of $41.92, the government’s stake was worth $69.68 billion, compared with the Treasury-only investment of $47.5 billion. This valuation excludes the special purpose vehicles, which includes stakes in AIA, MetLife and in AIG subsidiaries Nan Shan in Taiwan, Star Life and Edison Life Insurance in Japan and aircraft leasing firm International Lease Finance Corp.
“It is expected that proceeds from the monetization of these assets will be used to repay the SPV preferred interests in full,” the Treasury said.
Two other Federal Reserve bailout special purpose vehicles, Maiden Lane II and Maiden Lane III, hold AIG mortgage assets whose value now exceeds their original Fed loan amounts. These loans, totaling $27.8 billion, are expected to be repaid in full from the assets held in the vehicles, the Treasury said.
(Reporting by David Lawder; Editing by Andrew Hay, Gary Hill)