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Federal Government Poised to Make $15 Billion from AIG Investment

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The U.S. government’s fiscal watchdog said today that the federal government could ultimately make more than $15 billion from its investment in American International Group, an investment the government said was necessary to save AIG from insolvency.

The investments were made starting Sept. 16, 2008.

Besides the facilities, backed by bonds of various of various quality, and the stock of several AIG subsidiaries that have since been sold in whole or in part, at one point the cash loans to AIG by the Treasury Department and the Federal Reserve Bank of New York were as high as $225 billion.

The report by the Government Accountability Office was based on events up to March 22.

That was before the government finished selling off at a profit in late March and into April its total investment in the Maiden Lane II facility and also sold off at a profit the next week its most speculative assets in Maiden Lane III.

At the same time, the government Sunday announced it planned to sell off 5 percent of its AIG shares, or 163.934,426 shares, at $30.50, which Treasury officials estimate would raise $5 billion.

Treasury said it would sell 65,573,770 shares at the public offering price of $30.50 per share to AIG.

The $15 billion net profit estimate by the GAO was based on AIG’s closing stock price on March 30 of $30.83.

The report included the repayment of the Federal Reserve Bank of New York loan to AIG through the Maiden Lane facility, as well as repayments through sale of AIA Aurora LLC, another special purpose facility, and sales as of March of Treasury’s common stock in AIG.

“When all the assistance is considered, the amount the federal government ultimately takes in could exceed the total support extended to AIG by more than $15.1 billion,” the report said.

The GAO said this analysis is primarily based on repayments and recoveries and market valuation of AIG’s stock and does not include estimates of subsidy costs associated with the assistance.

“The actual repayment of the remaining assistance continues to depend on AIG’s long-term health, the timing of Treasury’s sale and the share price of AIG stock, among other things,” the GAO report said.

“As Treasury arranges to sell its stock in AIG to exit the company, several indicators suggest that the most likely buyers will be institutions, many of whom already have considerable holdings in other insurance companies,” the GAO report said.

The latest sale April 27, appeared to support GAO’s estimate.

It involved the sale of approximately $7.5 billion face value of the most exotic securities backed by sub-prime mortgage loans that almost brought American International Group under were sold Thursday through auction by the Federal Reserve Bank of New York.

The securities, called collateralized mortgage obligations, are backed by junk-rated mortgages, and were held by the NY Fed in the Maiden Lane III facility.

The Fed declined to disclose the exact sale price, to a consortium of two investment banks through an auction.

The Fed would only say that the  transaction “substantially reduces” the ML III portfolio and loan and were sold “at a desirable price.”

“I am pleased with the level of interest and the results of this process, especially with the strength of the winning bid, which represents good value for the public and significantly exceeds the original price ML III paid for these assets,” said William C. Dudley, president of the New York Fed. “This successful sale marks another important milestone in the wind-down of our crisis-era intervention.”

The government’s investment in AIG is obviously a moving target, with the sale of the most speculative of Maiden Lane III at a good price on April 27.

But, according to the GAO report, as of March 22, 2012, the remaining assistance to AIG was $46.3 billion, including unpaid dividends and accrued interest.

This amount includes Treasury’s $35.9 billion investment in AIG common stock and a balance of $8.3 billion owed by Maiden Lane III to the Federal Reserve Bank of New York (FRBNY).

This remaining assistance was down from $92.5 billion in March 2011 and $154.7 billion in December 2010, the report said.


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