The Treasury Department is laughing all the way to the bank. Insurance Giant AIG repaid $2.15 billion that it had borrowed through the Troubled Asset Relief Program (TARP). In 2008, the government helped the giant get back on its feet with a $180 billion loan. AIG has been gradually repaying the money. The most recent repayment is the result of the sale of AIG’s Taiwan-based subsidiary Nan Shan Life Insurance Company. One of AIG’s strategies for cutting its debt has been to raise funds by selling assets. “We continue to make progress in helping the Treasury and taxpayers recoup their investment in AIG,” according to AIG CEO Robert Benmosche.
Not surprisingly, the Treasury Department is pleased with the transaction. “This is another important milestone in AIG’s remarkable turnaround,” Tim Massad, the assistant secretary for financial stability, said in a statement. “We continue to make progress in recovering the taxpayers’ investments in AIG.” AIG still owes Treasury $51 billion. TARP legislation was passed by Congress in late 2008 to rescue the financial sector, which was on the verge of collapse.
Benmosche is still weighing whether to retain a stake in AIA Group Ltd. while repaying TARP funds. AIG sold 67 percent of Hong Kong-based AIA last year in an IPO that raised $20.5 billion. The remaining interest added $1.52 billion to AIG’s second-quarter profit as the Asian insurer’s stock price surged. AIA has soared 19 percent this year and is the number one gainer in the 73-company Bloomberg World Insurance Index. “It’s been a great investment, so they may want to hold onto it,” said Paul Newsome, an analyst at Sandler O’Neill & Partners LP.
Now that the Nan Shan deal has closed, AIG’s final significant disposal will be International Lease Finance Corporation, or ILFC, which purchases airplanes to lease them to airlines. The company is considering an initial public offering (IPO) for ILFC later this year. Using Nan Shan proceeds to repay the special purpose vehicle gives AIG “more flexibility as to what to do with ILFC and other assets, too. It adds in general to their cash-flow flexibility.” He is telling his clients to buy AIG stock. Treasury holds a $9.3 billion preferred interest in the special-purpose vehicle after accepting proceeds from the Nan Shan sale, according to AIG. Benmosche may delay or forego selling AIA shares. AIG’s agreement with underwriters lets Benmosche reduce or hedged the stake in October. “We’re looking potentially at monetizing other assets that we have so that AIA might be sold much later on, if at all,” he said.
Writing in The Hill, Peter Schroeder says that “In many ways, AIG came to serve as a symbol of much of the public’s anger over the bailout, as it found itself at the center of the historic financial crisis and reliant on substantial government support. That dissatisfaction came to a head in 2009, when executives at the company planned to distribute hundreds of millions of dollars in bonuses after billions in losses during the financial crisis. In January, AIG completely repaid the Federal Reserve Bank of New York with a $47 billion payment, and the Treasury in May agreed to sell 200 million shares of AIG stock, raising nearly $9 billion in that offering. The latest payback from AIG means the Treasury has recovered $313 billion of the investments it made under the Troubled Asset Relief Program (TARP) — roughly three-quarters of the $412 billion it originally dished out to keep the financial system afloat. The Treasury announced in March that it had officially turned a profit on the bank portion of TARP. It followed that up with a July announcement that it had exited its investment in Chrysler, ahead of schedule but losing about $1.3 billion in the process.”
On the Huffington Post, Jason Linkins has a cynical take on AIG’s recent repayment of TARP money. “Okay, I’m just going to stop it right there, because when it comes to ‘AIG’s remarkable turnaround,’ the devil is in the details. Time and time again we’re asked to celebrate the success of TARP. Back in March, the good news was that, ‘The Treasury currently estimates that bank programs within TARP will ultimately provide a lifetime profit of nearly $20 billion to taxpayers.’ But this profit that the government has turned on the bailout of AIG rings pretty hollow in light of the four different restructurings of the original agreement that the government has acquiesced to since the fall of 2008.
“When the Fed first stepped in to prevent AIG from collapse in September 2008, the deal was actually pretty good — it carried a punitively-high interest rate appropriate for a bailout, the CEO was dismissed and the company was going to sell itself off in parts, ending its too-big-to-fail status. If the government were turning a profit on a deal like this, it would indeed be good news. The trouble is, AIG’s new management didn’t break up the company very quickly. And even as it paid out lavish bonuses to its top-performing traders and executives, it couldn’t make good on its interest payments to the government. So the feds stepped in again — and again, and again — throwing more money at the company, reducing the interest that it would pay taxpayers and eventually converting the government’s loans to common stock, abandoning concrete repayment obligations in favor of whatever the stock might someday be worth.”
Tags: AUG, Bloomberg World Insurance Index, Chrysler, congress, Federal Reserve, Federal Reserve Bank of New York, financial crisis, International Lease Finance Corp, IPO, Nan Shan Life Insurance Company. AIA Group Ltd., Sandler O’Neill & Partners LP, TARP, Too big to fail, Treasury Department