Four years after the government injected billions of dollars into American International Group Inc. as it teetered on the brink of bankruptcy and was deemed too intertwined with the financial system to fail, it’s all over. The U.S. Treasury said Tuesday is was selling the last of its holdings for a profit.
Here are a few details from the Wall Street Journal:
The Treasury Department said it would generate $7.6 billion in proceeds from its sale of American International Group Inc. shares, as it sells nearly all its remaining holdings in the insurer it helped rescue at the height of the financial crisis.
The government said Tuesday it would sell about 234 million common shares at $32.50 each, matching the price it got when it sold an even larger slug of shares in September. AIG’s stock closed Monday at $33.36, and jumped 1.6% to $33.90 in heavy pre-market trading Tuesday.
The transaction is expected to close on Friday. By Treasury’s calculation, the final round of sales means the government will have a net positive return on its AIG bailout of $22.7 billion.
This step in AIG’s turnaround, which essentially closes the book on one of the most controversial bailouts of the financial crisis, seemed nearly unattainable in 2008, when the insurer’s imminent collapse sent shockwaves through the global economy. At the time, U.S. officials cobbled together a rescue package for AIG that effectively nationalized the insurer, arguing that AIG needed to survive to prevent a financial apocalypse.
And overall, the deal has been much better than expected according to this account from the New York Times:
With the latest sale, taxpayers have gained about $22.7 billion from a bailout that many predicted would prompt a staggering loss. In an effort to stabilize the global banking system, the government rescued A.I.G. just days after the failure of Lehman Brothers.
The stock sale also means that A.I.G. is a fully private enterprise once more, after the government owned as much as 92 percent of its shares. After the sale, the Treasury Department will hold only warrants to buy about 2.7 million shares of A.I.G. common stock, which will also be sold to generate a profit.
“On behalf of the 62,000 employees of A.I.G., it is my honor and privilege to thank America for giving us the opportunity to keep our promise to make America whole on its investment in A.I.G. plus a substantial profit,” Robert H. Benmosche, the insurer’s chief executive, said in a statement. “Thank you America. Let’s bring on tomorrow.”
Bloomberg wrote a piece about larger-than-life CEO Robert Benmosche and his strategy for the company. Excerpts follow:
“We are not at the finish line,” Benmosche, 68, wrote yesterday in a memo to employees of the New York-based firm after the U.S. said it would record a $22.7 billion profit on the $182.3 billion rescue. “We have to exceed the expectations of our clients, our investors, our regulators, and our other stakeholders around the world.”
Benmosche, who took over in 2009, is cutting costs and seeking to restore the reputation of a firm tarnished by its near collapse. After selling non-U.S. life insurance operations, the company is increasingly reliant on property-casualty coverage at the unit previously known as Chartis, a business that has reported an underwriting loss for four straight years.
AIG is “investing a lot of its energy in trying to execute a turnaround in Chartis,” said Josh Stirling, an analyst at Sanford C. Bernstein & Co. “When this starts to work, earnings are going to start to recover.”
AIG is seeking an underwriting profit of 5 to 10 cents on every dollar of premiums it collects for property-casualty coverage by the end of 2015, according to goals it laid out in a regulatory filing last year. Stirling said the company can get there by cutting expenses, raising prices for coverage, and doing a better job of evaluating risk and handling claims.
And I just love the Reuters story for putting the whole situation into context:
The sale will close the chapter on one of the most politically contentious government rescues of the global financial crisis and turn a profit for taxpayers, which was once thought to be inconceivable.
At one point, the government estimated that it would never recover all of the bailout money, but as AIG restructured and returned to viability, it was able to repay the entire rescue fund plus generate a profit for U.S. taxpayers.
“No taxpayer should be pleased that the government had to rescue this company, but all taxpayers should be pleased with today’s announcement, ending the largest of the government’s financial industry bail-outs with a profit to the Treasury Department,” Jim Millstein, the Treasury’s former chief restructuring officer, said in a statement.
AIG was rescued just before it would have been forced to file for bankruptcy protection in September 2008 as losses on risky derivatives mounted. It was bailed out as the world’s financial system stood at the brink of disaster, shortly after Lehman Brothers filed for bankruptcy and Merrill Lynch sold itself to Bank of America Corp (BAC.N).
AIG was one of the Treasury Department’s most hotly contested bailouts. U.S. lawmakers began calling for Treasury Secretary Timothy Geithner’s resignation after it was revealed that AIG paid $165 million in retention bonuses to employees of the derivatives unit that has been blamed for the company’s financial distress at that time.
No matter what you think of the bonuses, the bailout or the financial crisis, this is good news – exiting a bailout with an unexpected profit. Now that’s reason to celebrate.
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And what about the present dollar value of $185 billion to AIG over four years? It's a calculation that every MBA student learns, but the government doesn't use it because the government can print its own money and expand its balance sheet far beyond what ordinary mortals can achieve.
I have said for years that the only way the Treasury will show a profit on AIG is through the magic of government accounting. That is what produced the $22 billion "net positive return."
That even the New York Times fell for this shill is evidence not too many in the media have been paying attention.