U.S. Treasury Could See $15 Billion Profit from AIG Bailout: GAO

May 8, 2012

U.S. taxpayers could see a profit from the 2008 bailout of American International Group Inc. (AIG), according to a Congressional report.

“When all the assistance is considered, the amount the federal government ultimately takes in could exceed the total support extended to AIG by more than $15.1 billion,” the U.S. Government Accountability Office (GAO) said in its report.

GAO said that since its last report in July 2011, more of the assistance provided by the Treasury department and the Federal Reserve System to benefit AIG has been repaid. As of March 22, 2012, the remaining assistance to AIG was $46.3 billion, including unpaid dividends and accrued interest. This amount includes Treasury’s $35.9 billion investment in AIG common stock and a balance of $8.3 billion owed by Maiden Lane III to the Federal Reserve Bank of New York (FRBNY).

This remaining assistance was down from $92.5 billion in March 2011 and $154.7 billion in December 2010. As of March 2012, the government’s remaining outstanding assistance to AIG has continued to be reduced, mostly because of repayments on the FRBNY loan to Maiden Lane II; repayment of AIA Aurora, LLC, a special purpose vehicle; and sales of Treasury’s common stock in AIG.

The government’s outstanding assistance to AIG is largely composed of Treasury’s common stock in AIG. Treasury sold AIG stock in May 2011 and March 2012, which yielded $11.8 billion and reduced Treasury’s ownership to 70 percent of the company. Treasury’s stake in AIG was reduced to 61 percent with another $5.8 billion sale of stock this week.

The remaining assistance through Maiden Lane III will likely be repaid in full and net additional returns to the government, according to GAO. The federal government could ultimately take in $15.1 billion more than the total support extended to AIG, GAO said. The watchdog agency said its analysis is primarily based on repayments and recoveries and market valuation of AIG’s stock and does not include estimates of subsidy costs associated with the assistance.

GAO said The actual repayment of the remaining assistance continues to depend on AIG’s long-term health, the timing of Treasury’s sale and the share price of AIG stock, among other things.

AIG had a net income for 2011 of $18.5 billion, primarily attributable to an income tax benefit and divested businesses. AIG’s operating cash flows declined in 2011, which was mostly due to cash payments covering several years of accrued interest and fees on the FRBNY revolving credit facility and reduction in cash flows from the absence of a full year of operating cash flows of foreign life subsidiaries that were sold during the year. Also, payments on catastrophic loss claims and asbestos liabilities reduced operating cash flows.

AIG was profitable in most quarters with investment income contributing considerably to its profitability, including in several quarters when insurance underwriting itself lost money.

“The sustainability of any positive trends in AIG’s operations will depend on how well it manages its business in the current economic environment,” GAO said.

After AIG posted results for the fourth quarter of last year that included a $1.3 billion profit on insurance operations, CEO Robert Benmosche was upbeat.

“To us, the fourth quarter is a clear demonstration that this company has not only survived, it’s got its strength, it’s got its key people, and we are moving in the right direction,” he said.

AIG Chief Financial Officer David Herzog said that the fourth quarter results “signifies our view that we have returned to sustainable profitability.”

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