The Treasury Department on Tuesday sold its remaining 16% of American International Group common shares for $7.6 billion, putting an end to the government’s 50-month shotgun financial tryst with the global insurer.
Industry officials, financial analysts and Washington insiders speculate that Treasury’s sale of its remaining 234 million common shares of AIG through an initial public offering will set the stage on Thursday for designation of AIG as the first systemically significant non-bank. That is expected to take place at a closed meeting of the Financial Stability Oversight Council.
Washington Analysis, a buy-side analyst group, said in a weekly bulletin to subscribers 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 say they expect only AIG to be designated a SIFI at this meeting, with decisions on other non-banks debated one-by-one into next year.
If AIG is so designated, it would be historic, marking the first time that an insurance company would be federally regulated.
Washington Analysis researchers say, however, that the exact details of what non-bank SIFI status will mean will not become clear until the Fed issues additional rules during 2013’s first quarter.
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.
The 234.2 million shares of AIG were priced Monday 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 overall bailout netted taxpayers a profit of about $22.7 billion.
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.
“We are very pleased to repay 100% of all that America invested in AIG plus a total combined positive return – or profit – of $22.7 billion,” said AIG President and Chief Executive Officer Robert H. 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.”
Bank of America Merrill Lynch, Citigroup, Deutsche Bank Securities Inc., Goldman, Sachs & Co. and J.P. Morgan Securities LLC have been retained as joint book runners for the offering, Treasury says.
The Treasury, the Federal Reserve Board and the Federal Reserve Bank of New York became involved with AIG in September 2008 when a unit of AIG’s holding company, AIG Financial Products, had issued credit default swaps on what was later learned to be $2.77 trillion of securities and synthetic securities backed by mortgages of varying quality.
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 put up collateral. AIG became unable to raise the cash to meet such margin calls.
After several banks declined to provide a private-sector solution, the NY Fed provided an initial $85 billion in cash in exchange for 79.9% of AIG’s stock.
The NY Fed, in tandem with the Federal Reserve Board and the Treasury departments of the Bush and later Obama administrations, ultimately invested more than $100 billion in additional funds.
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 dealing with the huge liability from the CDS, later investigations by the Government Accountability Office and the Pennsylvania Insurance Department found that AIG’s insurance subsidiaries, both life and property and casualty, had cross-guaranteed the liabilities of AIGFP.
Among the issues that surfaced during the government’s rescue was the fact that AIG officials who had led the company astray, including those in London who had devised the CDS investment, were owed more than $100 million in bonuses.
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, Benmosche 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.