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.