The Treasury Department is selling its remaining 16 percent of the common shares of American International Group (AIG), hopefully putting paid to its tumultuous 50-month shotgun financial tryst with the global insurer.
Industry officials, financial analysts and Washington insiders speculate that the sale of its remaining 234 million common shares of AIG through an initial public offering will set the stage for Thursday’s designation of AIG as the first systemically significant non-bank (SIFI.)
That is expected to take place at a closed meeting of the Financial Stability Oversight Council (FSOC).
The government said that it could not regulate AIG, as supported even by Republicans in Congress, until its stake in the company fell below 50 percent, which occurred in August. However, it apparently decided to divest all interest in the company before beginning the process of regulating AIG.
Washington Analysis, a buy-side analyst group, said in a weekly bulletin to subscribers on Monday that the FSOC will likely have on its agenda whether to designate AIG, Prudential Financial and General Electric as systemic significant non-banks.
However, other Washington officials said they expect only AIG to be designated a SIFI at this meeting, with decisions on other non-banks being considered for SIFI designation to be debated one-by-one into next year.
If AIG is designated, it would be historic, marking the first time that an insurance company would be federally regulated.
Washington Analysis researchers said, however, that the exact details of what non-bank SIFI status will mean will not become clear until the Fed issues additional rules during the first quarter of 2013.
Such designations were created through provisions of the Dodd-Frank financial services reform act of 2010. Under the law, the Federal Reserve Bank would be the consolidated regulator of AIG, but the states would still oversee its insurance operating subsidiaries.
States have always supervised insurance companies, both operating subsidiaries and the holding companies. This was confirmed through the McCarran-Ferguson Act of 1945, reiterated through a congressional resolution included in the 1999 Gramm-Leach-Bliley Act, and again through provisions of the Dodd-Frank Act.
The 234.2 million shares of AIG were priced last night at $32.50, according to AIG. When the deal closes Friday, Treasury will have sold the last of its remaining shares of AIG common stock, receiving proceeds of approximately $7.6 billion from the sale, AIG said.
The closing of this transaction will mark the full resolution of America’s financial support of AIG. After the closing of today's offering, Treasury will continue to hold warrants to purchase approximately 2.7 million shares of AIG common stock – the sale of which is expected to provide an additional positive return to taxpayers.
Since September 2008, America committed a total of $182.3 billion in connection with stabilizing AIG during the financial crisis. Since then, through asset sales and other actions by AIG, America has not only recovered all $182.3 billion but also earned a combined positive return of $22.7 billion.
Bank of America Merrill Lynch, Citigroup, Deutsche Bank Securities Inc., Goldman Sachs & Co. and J.P. Morgan Securities LLC have been retained as joint bookrunners for the offering, the Treasury said.
The Treasury, the Federal Reserve Board and the Federal Reserve Bank of New York became involved with AIG in September 2008. That was because a unit of AIG’s holding company, AIG Financial Products, had issued credit default swaps (CDS), a form of insurance, on what was later learned to be $2.77 trillion of securities and synthetic securities backed by mortgages of varying quality. That is, they ranged from conventional mortgages to sub-prime mortgages.
As the value of the underlying securities declined, and AIG’s credit rating was lowered by rating agencies, the terms of the CDS required AIG to provide cash to the holders of the CDS to ensure they were paid.
AIG became unable to raise the cash to meet such margin calls as its stock price dropped and the money markets tightened as the economy declined.
Finally, after several banks declined to provide a private sector solution, the NY Fed stepped up to the plate September. 16, 2008 with an initial $85 billion in cash in exchange for 79.9 percent of AIG’s stock.
The NY Fed, in tandem with the Federal Reserve Board and the Treasury department of the Bush and later the Obama administration, ultimately invested more than $100 billion in additional funds, as well as the creation of facilities, and the federal government’s credit as implied backing of AIG.
The Fed is in the process of closing out two facilities jointly funded by the Fed and AIG cash as well as subprime securities owned both by AIG Financial Products and its life insurance subsidiaries. It also sold its common share ownership to the Treasury Department, which has been selling off its ownership since last year.
The company’s plight was best articulated in a November federal court decision throwing out a case brought by Starr International, a predecessor company of AIG and Maurice “Hank” Greenberg, a primary shareholder of Starr and former longtime chairman and CEO of AIG.
In the decision, the court said that, “in September 2008, “AIG was in extremis, and its independent board of directors, to save the company, voluntarily accepted the hard terms offered by the one and only rescuer that stood between it and imminent bankruptcy—the NY Fed.”
“Specifically, based on Starr’s own allegations, (1) AIG, as of mid-September 2008, was in dire straits, whether as a result of its own business decisions, the unraveling state of the financial system, the lack of available liquidity, or a perfect storm of these and other factors, and was actively considering bankruptcy; (2) AIG had not found any effective rescuer in its hour of need other than Federal Reserve Board of NY, and had run out of time to keep looking; and (3) AIG’s Board, unwilling to accept bankruptcy and the ‘public opprobrium’ and ‘risk of legal liability’,” that would come with it, acceded—regretfully, and perhaps angrily, but, as a matter of law, voluntarily—to the hard terms on which the NY Fed was willing to extend the $85 billion credit facility,” the decision said.
“Far from describing actual control of AIG by an outside party, these allegations describe a moment of corporate desperation, in which AIG’s board grabbed the sole lifeline extended to the company,” the decision concluded.
The sale, if completed, would end several controversial and tense chapters in the life of Timothy Geithner, who is expected to leave his role as Treasury secretary early next year.
Geithner was president of the NY Fed when the Federal Reserve Board was told by Henry Paulson, then secretary of the Treasury in the Bush administration, to rescue AIG.
Besides finding that AIG wasdealing with the huge liability from the CDS, later investigations by the Government Accountability Office and the Pennsylvania Insurance Department found that the AIG insurance subsidiaries, both life and property/casualty, had cross-guaranteed the liabilities of AIG Financial Products.
As the problems of AIG became clear in 2009, House Republicans seeking political cover from the fact they had accepted campaign donations from AIG during its heyday told him, “I have no confidence in you,” and, “You should resign.”
Amongst the issues that surfaced was the fact that AIG officials who had led the company astray, including those in London who had devised the CDS investment strategy as well as had speculated in billions of dollars of highly speculative securities such as collateralized debt obligations secured by mortgages of dubious quality, were owed more than $100 million in bonuses.
Geithner bore the brunt of the criticism although the Fed was barred by a provision of the Gramm-Leach-Bliley Act from supervising or even looking at the books of insurance holding companies.
The political solution that resulted was a reduction in the amount of bonuses paid as well as a system overseen by attorney Ken Feinberg that limited the bonuses companies receiving federal aid could pay their employees.
Indeed, Robert Benmosche, president and CEO of AIG, said one of the reasons he wants the federal government to divest itself of a financial interest in AIG is to be rid of the limits on executive compensation imposed on those who received bailouts in the 2008-2010 period.
“We are very pleased to repay 100 percent of all that America invested in AIG plus a total combined positive return – or profit – of $22.7 billion,” said Benmosche. “On behalf of the 62,000 employees of AIG, it is my honor and privilege to thank America for giving us the opportunity to keep our promise to make America whole on its investment in AIG plus a substantial profit. Thank you America. Let’s bring on tomorrow.”