Daniel Gross

Cost of AIG Bailout Continues to Decline With Stock Sale

Contrary Indicator

Among the many bailouts of 2008 and 2009, AIG was always the outlier. It was the largest single recipient of funds, getting $182 billion from the Treasury Department and the New York Federal Reserve. It was the most infuriating, as a large chunk of the cash went directly to repay investment banks that had purchased junky insurance on junky assets from AIG. And it seemed the least likely to be returned. How could one company generate enough cash to return all that capital, while keeping shareholders happy and maintaining the level of financial strength that the markets and customers require from insurance companies?

The answer: slowly.

AIG was a very large company, with a bunch of very valuable, good (even excellent) businesses that was lashed to an extremely large unit, AIG Financial Products, which took on enormous liabilities without bothering to set aside the money to pay for them. The Fed saved AIG (and its counterparties) by taking huge portfolios of mortgage-backed securities and CDOs off its hands, and then extended credit that was to be backed by assets like AIG's Asian insurance operations. Over time, AIG staged a few very large asset sales and paid off a big chunk of the Fed loans. Then, as the credit markets healed, the securities that the New York Fed acquired rose in value and threw off interest. That dynamic, combined with periodic asset sales, has allowed Maiden Lane II and Maiden Lane III, the two vehicles created by the Fed, to pay down their loans with money left to spare.

That has left the stock of the company that is owned by the Treasury. As of last May, Treasury owned 1.455 billion shares of the company, equal to a 77 percent stake. The bailout won't be over until all those shares are either sold to the public, or sold back to the AIG. That process is continuing. In March, Treasury sold about 200 million shares of AIG worth $6 billion, cutting its stake to 70 percent. And this week, it took another step to reduce its position. In an offering, it sold 188.5 million shares at $30.50 each, bringing in $5.75 billion. That money, like all the returns from TARP programs, goes into Treasury's coffers to help pay for government operations.

Treasury still has a long way to go. The sale reduced the government's stake from 70 percent to 61 percent. (The details of Treasury's holdings can be seen here) So it will require about seven more sales of this magnitude before the taxpayers fully exit their "investment" in AIG. The good news is that AIG, which is once again a profitable company, is participating in the process by purchasing some of the shares directly from Treasury. In the most recent sale, AIG accounted for $2 billion of the $5.75 sale.

There's still a very long way to go. But there's at least a path to an exit. And the Government Accountability Office now believes the taxpayers could wind up turning a "profit" of $15.1 billion on the AIG rescue. In order for that to happen, AIG's stock will have to stay at or near current levels for long enough for the government to unload its remaining 1,059,616,821 shares!

Daniel Gross is economics editor at Yahoo! Finance.

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com.

His new book, Better, Stronger, Faster, is on the shelves now.

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