WASHINGTON BUREAU — The U.S. Government Accountability Office (GAO) says the chances of the government profiting from its investment in American International Group Inc. (NYSE:AIG) now depend on the state of the economy and the skills of AIG's managers.
"The government's, and thus the taxpayer's, exposure to AIG increasingly is expected to be tied to the success of AIG, its ongoing performance, and its value as seen by investors of AIG's common stock," Orice Williams Brown, a GAO director, writes in a letter summarizing the GAO's findings on AIG.
The GAO report has come out just a week after AIG, New York, and the U.S. Treasury Department announced that they were implementing a recapitalization plan that would help restructure, and eventually end, government involvement in AIG.
The Treasury Department and the Federal Reserve System have been supporting AIG ever since the 2008 credit freeze forced the company to seek government help to stay in business.
Last week, AIG used $21 billion in cash raised from operations and subsidiary sales to pay off credit facilities provided by the Federal Reserve Bank of New York. AIG then traded common stock for many of the AIG preferred shares held by the Treasury Department.
The Treasury Department now owns 92% of AIG's common stock and some AIG preferred shares, and it says it has a $68 billion investment in AIG.
The GAO has based the new AIG status report primarily on AIG's financial status as of Sept. 30, 2010, the end of the government's latest fiscal year.
Largely due to federal assistance, "AIG's financial condition has generally remained relatively stable or showed signs of improvement since GAO's last report in April 2010," GAO officials say.
Tthe sustainability of any positive trends in AIG's operations "depends on how well AIG manages its business, and the government's ability to fully recoup the federal assistance will be determined by the long-term health of AIG and subject to uncertainty arising from the likelihood of future changes in general economic, regulatory, and market conditions," officials say.
Federal assistance does appear to be facilitating an orderly restructuring of the company, officials say.
AIG Financial Products – a unit that wrote "credit default swaps," or derivatives designed to pay off if a debt issuer defaulted – brought AIG near to collapse in September 2008, when escalating default risk at the unit and escalating demands for collateral forced the parent company to seek cash at a time when the credit markets were providing no cash.
AIG Financial Products seems to be continuing
to unwind its credit default swap positions and its portfolio of super senior credit default swaps, GAO officials say.
AIG insurance operations also are showing signs of recovery, "but federal assistance has been a critical factor," officials say.
During the first three quarters of 2010, additions to AIG life and retirement policyholder contract deposits exceeded withdrawals, and the companies' pretax operating income remained positive, officials say.
AIG's property-casualty companies "remain stabilized," officials say.
Other GAO AIG report gleanings:
- During the quarter that ended Nov. 30, 2010, AIG raised $7.2 billion in cash and $9 billion in noncash proceeds by disposing of subsidiaries and other major assets.
- AIG's consolidated shareholder equity increased to about $81 billion as of Sept. 30, 2010, from about $53 billion in December 2008.
- The GAO AIG organizational chart appendix takes up about 4 pages of small type.
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