U.S. Treasury exits AIG as company sets growth plans

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Published December 11, 2012

| Reuters

The U.S. Treasury's sale of its remaining stake in American International Group Inc will fetch $7.6 billion, bringing the government a total profit of $22.7 billion from its bailout of the insurer in the financial crisis four years ago.

The share offering will close the chapter on one of the most politically contentious rescues of 2008, which ultimately gave AIG up to $182 billion of government support.

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.

"Thank You - We Did It," AIG Chief Executive Robert Benmosche wrote in a memo to AIG staff Tuesday. "Today warrants a celebration like no other in AIG's history and places well in the past a crisis none of us will ever forget."

AIG said on Tuesday that the Treasury agreed to sell 234.2 million shares to investors for $32.50 apiece. The insurer said that Treasury has additional AIG warrants that it can sell to boost the government's $22.7 billion of total returns so far.

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.

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.

It prompted Republican lawmaker Charles Grassley to call for AIG executives to resign or commit suicide, though the Iowa senator eventually backtracked from those comments.

The company also funneled more than $90 billion of taxpayer money - more than half the funds the government used to rescue AIG - to various European and Wall Street banks, including Goldman Sachs, Deutsche Bank and Barclays Plc.

The sale price of $32.50 represents a 2.6 percent discount to AIG's Monday close of $33.36. The sale is due to close on Friday. AIG's shares were up 4.4 percent at $34.84 in midday trading on Tuesday.

DONE WITH ASSET SALES

Since 2008, AIG has been selling assets to pay back the government. On Monday, it announced the sale of its aircraft leasing business ILFC to a Chinese consortium for up to $4.8 billion.

But, with the bailout at an end, the company's asset sales may also be over.

"At this point there aren't many pieces that are left. You have the company you expect to have in the long term," Sandler O'Neill analyst Paul Newsome said.

The company, which consists of its core U.S. life, global property and casualty, and U.S. mortgage insurance units, will now have to focus on turning around earnings at the property and casualty business, formerly known as Chartis.

That business has higher loss ratios than peers and has been increasing premiums, as it and the rest of the industry grapple with large catastrophe losses.

Last week, AIG said it would contribute $1 billion to its U.S. property subsidiaries to help cover the $1.3 billion loss its expects from Superstorm Sandy.

"This is an investment opportunity. They are trading at a larger discount to book value than peers and we see them getting to book value in a couple of years," Sanford C. Bernstein analyst Josh Stirling said.

AIG trades at half of its book value, compared to property and casualty peers Travelers Co and Chubb Corp which trade above book value, according to Thomson Reuters Starmine.

BENMOSCHE GETS CREDIT

Benmosche, the former CEO of MetLife, took over as CEO of AIG in August 2009, replacing Edward Liddy, who had been installed by the U.S. government. He will ultimately get the lion's share of the credit for turning the company around and preventing a fire sale of its assets.

Benmosche salvaged some of the company's businesses, defended the company's employees against their detractors and figured out a path forward that would let the company both repay the government and stay in business.

Treasury and AIG said that the sale was jointly led by Bank of America Merrill Lynch, Citigroup, Deutsche Bank , Goldman Sachs and JPMorgan Chase & Co .

The sale closes out AIG's bailout, but other companies still owe the government. The latest Treasury estimate has the Troubled Asset Relief Program ultimately costing the U.S. taxpayers $60 billion. Among the companies still paying back the government are General Motors, auto lender Ally Financial Inc and a series of small banks.

"It was an ugly process," said Greg Valliere, chief political strategist with Potomac Research Group, but he added: "Bottom line is that the government made money."

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