AIG Reaches a Deal to Fully Repay Taxpayers

USA Today

American International Group, which drew the brunt of public anger over big federal bailouts during the financial crisis, has reached an agreement with the government on a plan to pay back its debt, AIG announced Thursday.

Under the plan, taxpayers should at least recoup their investment and possibly turn a profit, analysts say.

"This is a pivotal milestone as we deliver on our long-standing promise to repay taxpayers, and we thank the America people for their support," AIG CEO Robert Benmosche said.

Treasury Secretary Tim Geithner said the plan "dramatically accelerates the timeline for AIG's repayment" and positions taxpayers to recover their investment.

The insurance giant received a $182 billion federal bailout package as it teetered near collapse in September 2008 amid the subprime mortgage crisis. AIG was nearly shut down by its massive stake in derivatives known as credit default swaps — essentially insurance against the risk that certain mortgage securities would default.

Its outstanding debt to the government is about $95 billion.

Under the plan, the Treasury Department would convert $49.1 billion in AIG preferred shares into common stock. Treasury's stake in the company would rise from about 80% to 92%. It would sell its shares over what's expected to be one to two years.

Treasury is expected to receive about 1.66 billion shares, and it stands to break even if it sells them for about $29 a share. AIG shares closed Thursday at $39.10, up $1.65.

Before the stock conversion, AIG must repay a $20 billion debt to the Federal Reserve Bank of New York that was part of the bailout. AIG plans to sell assets to fund it. Treasury also will take over $22 billion of $26 billion in preferred shares the Fed owns in another AIG vehicle. AIG plans to sell other assets to repay Treasury and the rest of the Fed's stake.

Analyst Christopher Whalen of Institutional Risk Analytics says the government's sale of AIG shares will dilute the stock in a sluggish market, hurting shareholders: "We don't need another big seller in the market."

UBS analyst Andrew Kligerman says Treasury is getting fewer shares than expected, making the deal less diluted for shareholders. AIG also plans to issue 75 million warrants to existing shareholders, allowing them to buy shares over 10 years at a $45 strike price — an effort, Kligerman says, to compensate them.