The American Taxpayer Is Earning A Huge Profit On AIG

timothy geithner

Photo: AP Images

Sept. 11 (Bloomberg) — American International Group Inc. shares valued at $18 billion were sold by the U.S. government, converting a four-year bailout into a profit for taxpayers.The U.S. sold about 553.8 million shares at $32.50 apiece, the Treasury Department said yesterday in a statement. The New York-based insurer bought $5 billion of the stock. The U.S. has recovered its full $182.3 billion commitment under the rescue with a profit of about $12.4 billion and still holds about 22 per cent of the insurer’s shares for future sale, Treasury said.

“To stabilise and then restructure the company with a very substantial positive gain for the American taxpayer is a significant accomplishment,” Treasury Secretary Timothy Geithner said in the statement. “We need to continue the critical task of implementing Wall Street reform so that the American economy is never put in this position again.”

AIG, once the world’s largest insurer, was bailed out in 2008 amid a worldwide credit crunch. The rescue was among measures the U.S. government and central bank undertook to thwart the deepest financial crisis since the Great Depression. As much as $12.8 trillion was spent, lent or committed to bolster financial firms and automakers.

AIG fell 2 per cent to $33.30 yesterday in New York before the announcement. Treasury still holds 317.2 million shares, valued at about $10.6 billion based on yesterday’s trading.

The sale cuts the government stake from 53 per cent, marking the first time since the rescue that the U.S. doesn’t hold majority control. Chief Executive Officer Robert Benmosche, 68, is buying back stock to help AIG regain independence and increase the value of remaining shares. He’s raised funds for repurchases by divesting assets including most of its stake in Hong Kong-based insurer AIA Group Ltd.

Government’s Plan
“The government’s looking to get rid of all their shares,” said Jim Leonard, an analyst at Morningstar Inc. “They’ve been dinged up so bad, and for a value investor, they’re at a good level.”

AIG trades for about 55 per cent of book value, a measure of assets minus liabilities. The insurer has gained 44 per cent this year after plunging 98 per cent in the 60 months ended Dec. 31.

Treasury had cut its stake in four earlier share sales, raising about $23.3 billion. The fourth sale, announced Aug. 3, came in the same week that AIG reported that second-quarter net income rose 27 per cent from a year earlier to $2.33 billion, driven by improving results at its property-casualty operation.

With the Treasury stake below 50 per cent, the Federal Reserve will become the company’s regulator, the insurer said in a preliminary prospectus supplement. AIG may face capital requirements and limits on its ability to repurchase stock or pay a dividend, under Fed oversight, according to the document.

Purchase Option
Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc. and JPMorgan Chase & Co. managed the offering, Treasury said. Underwriters have a 30-day option to buy as many as 83.1 million additional AIG shares from the Treasury, according to the statement.

The U.S. needs to average about $28.73 a share on the sales to break even on the equity stake it acquired as part of a 2008 bailout, excluding unpaid dividends and fees, according to the Government Accountability Office. The first two offerings were priced at $29 a share, and the second two at $30.50.

The Treasury’s shares are the last piece of a bailout that swelled to as much as $182.3 billion, including support from the Federal Reserve Bank of New York. The government’s profits were generated by the Fed, which extended a credit line to AIG and purchased mortgage-linked investments from the insurer.


–Editors: Dan Reichl, Peter Eichenbaum

To contact the reporter on this story: Zachary Tracer in New York at [email protected]


To contact the editor responsible for this story: Dan Kraut at [email protected]

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