AIG to fully repay U.S. government

[RamboLiberal]

Source: CNN

NEW YORK (CNNMoney) -- American International Group, which received a massive bailout in 2008, said Wednesday that it expects to complete a recapitalization by the end of the week that will allow it to fully pay back the government.

Following through on a plan announced last year, AIG (AIG, Fortune 500) will convert outstanding preferred shares acquired by the Treasury into common stock. When the transaction is complete, the Treasury will own approximately 92% of AIG's common shares.

The company said Wednesday that it expects Treasury will sell its shares of common stock over time, repaying the debt.

"With today's announcement, we anticipate that we will be able to deliver on our promise to the American people to repay the extraordinary assistance they provided to AIG during the financial crisis of 2008," Robert Benmosche, AIG President and CEO, said in a statement.

In addition, AIG said it will repay the Federal Reserve Bank of New York $21 billion to cover the loans made by that branch of the central bank. That payment comes from applying proceeds from various asset sales, the latest of which came on Wednesday when AIG unloaded its Taiwan unit for $2.16 billion in cash.



Read more: http://money.cnn.com/2011/01/12/news/companies/aig_treasury/index.htm?hpt=T2

[mbperrin]

1. So they are repaying nothing. They're trading old stock for new.

Wish I could talk my lenders into that. "Here's a new piece of paper that says you can try to sell it someone else for what I owe. That clears me. Tata!"

As if.

[On the Road]

They're Converting the Convertible Preferred Stock

The Fed now has an asset that can easily be sold on the open market over time. That is worth 92% of the market capitalization, which right now is $41B.

In addition, they repaid $21B cash.

To tell you the truth, I'm shocked. AIG had to be prevented from going under, but I really thought that money was down the drain. The TARP deal is looking better than ever.

[Yupster]

4. It really has turned out to be quite a success

Someday I think it will be considered brilliant -- and I got a souvenier. At the height of the crisis, an AIG guy came to my office and gave me an official AIG ice cream scoop.

[SkyDaddy7]

5. And the RIGHT says Government NEVER does anything correct. nt.

[Fool Count]

7. Easily? How does one sell 92% of stock without massively devaluing the shares?

Even if US government manages that feat, how will that be "full repayment"? AIG drew $90 billion on the initial
credit facility by October 2008. That's well over $100 billion with interest and not counting additional bailouts.
Current AIG stock valuation is derived mostly from its being almost fully nationalized and thus protected from failure
by financial might of US government. With USG bailing out of AIG shares the holders of that remaining 8% will likely
want to do the same. Who will be buying the stock?

[On the Road]

9. That's Correct, You Would Never Sell 92% of the Shares Immediately

The point is, the government has $41B of stock + $20B cash as return for its bailout of AIG.

As to who will be buying the stock: six million shares are being bought every day.



You are correct that the government will take a loss on the transaction, but it appears to be limited to about 30% of the cash infusion (less if the stock keeps rising).

[mbperrin]

8. "Over time" - not cash, is it? And would result in a loss if sold at once.

Like I said, discharging a debt by issuing a piece of paper that the lender may be able to sell to some third party someday to get money.

Love to have that option for my own debts!

[On the Road]

10. Stock is an Asset

If you were a company like AIG and that was your only major asset, you probably could use it discharge your debts.

[mbperrin]

12. So my incentive is to get myself completely broke and out of cash,

and then I can produce a security which my lender may be able to sell to somebody someday for something, but I get marked paid in full as soon as I give him the security?


Nobody sees any moral hazard in this course at all?

[On the Road]

14. AIG Lost Billions

Moral hazard is certainly and issue, but in return for saving the company AIG lost billions and gave 92% of its stock to the Federal government. That's hardly an incentive.

It is true that the government took a loss of the company. From the high-level numbers, it would appear to be about $30B. But it's a far cry from the $150B number that was thrown around a year or two ago, and the government got back two thirds of its bailout money. That's a small price to pay for saving the company from the effects of an IAG failure. I wish the government had taken over the stock of Bank of America and some other banks in a similar manner.

[mbperrin]

15. I wish they had let them fail as a lesson to others tempted to do the

things they did.

I'll be amazed if this stock sells for 50% of its face.

Well, we'll see, won't we?

[On the Road]

17. Everything That Has Come Out About the Derivatives Meltdown

suggests that AIG would have taken multiple large banks out if it completely failed. That is the reason it was necessary -- otherwise I would agree with you.

Typically banks on the verge of failing are merged with larger banks at the behest of the Fed or Treasury. That is what happened with Merrill Lynch. There was no bank, however, in a position to assimilate Bank of America or another one of the Big Four.

The consequences of a major bank failing would have been widespread, even if it were only limited to BoA. For example, business deposits are not covered by FDIC insurance, as personal accounts are. Any small or large business using BoA for its payroll account would not have been able to issue paychecks. If the government had decided to compensate businesses for those accounts to prevent a ripple effect, the cost would have been an order of magnitude greater than simply bailing out AIG.

That's why I believe an AIG bailout was necessary. I had thought the cost was around $150B that was completely down the drain, but if it's only $30B, that is IMO a cheap price to pay for the beneficial effects.

As far as no one wanting to buy AIG, if you look at the long-term chart there is a lot of upside. If AIG stabilizes and has any kind of a future, it will probably rise a lot over the next few years. I might have bought some myself, but like a lot of people I wasn't even looking in that direction.

But that's my opinion -- I guess we will see what happens.

[mbperrin]

18. Well, we should have let it come down, and the next generation

would be a lot more cautious, less prone to allow businesses to grow stupidly large, and much more interested in the actual details of what's going on with their money.

I'm mad about paying for something I haven't used since 1978, when we left the banking system.

[On the Road]

20. You'd be Paying a Lot More Without TARP

If AIG repays the loans fully, that leaves the government on the hook for a few small banks. It's about the cheapest financial meltdown you can imagine.

IF AIG failed and took down some major banks, the cost in lost tax revenue, not to mention FDIC insurance payments, would be in the hundreds of billions or most likely trillions.

Bear Stearns and Lehman Brothers were lesson territory, and that was almost too much for the system. Economic life as we know it would most likely not exist if the system crashed.

[mbperrin]

22. I'd pay nothing if my solution had be enacted. The stockholders of those

failed companies would have paid - that's what risk is for investors.

As it is, I've been drafted into making an investment I find repulsive and fraudulent, where the original stockholders and the incompetent management give up nothing, receive bonuses in the case of management, and I as a taxpayer take a haircut.

I haven't used banking services since 1978, so I feel extra resentful. I had gotten away from the parasitical shadow economy and have been dealing in the real for a long time.

[On the Road]

23. It was Widely Believed at the Time

that an AIG failure would cause a chain reaction among world financial institutions (http://www.washingtonpost.com/wp-dyn/content/article/2009/03/09/AR2009030902806.html">WaPo article).

Here are some numbers on a very limited scenario in which only Bank of America failed as a result of the government not keeping AIG in business:

(1) The FDIC insures about $8Trillion of personal deposits. Here's a list of the largest FDIC-insured deposits:

Company                         #States #Off    Dom Dep($B) %ofTotDep

Wells Fargo & Company            40 6,586   750.4  9.8%
Bank of America Corporation      36 6,041   916.1  11.9%
U.S. Bancorp                     26 3,056   169.2  2.2%
JPMorgan Chase & Co.             24 5,227   652.7  8.5%
PNC Financial Services Group     16 2,572   177.3  2.3%
Regions Financial Corporation    16 1,774    95.8  1.2%
KeyCorp                          15 1,027    61.8  0.8%
Citigroup Inc.                   15 1,023   307.3  4.0

http://www.fdic.gov/bank/analytical/quarterly/2010_vol4_4/FDIC_Quarterly_v4n4_SOD_120610.pdf

If BoA had failed, the FDIC would have been on the hook for over $1 Trillion in deposit insurance, including business accounts (below). If other banks failed in the process, it could have been several times that. That risk alone is more than enough reason to institute a bailout of AIG.

(2) Maybe even more important are business deposits.

        Size                 #Establ          #Employees      Payroll($K)
Zero Employees	       19,523,741			
1-100 Employees		5,197,440	41,839,701	1,289,644,895
100+ Employees		1,386,929	73,235,223	2,924,307,288
Total		       26,108,110      115,074,924	4,213,952,183

http://www.census.gov/epcd/www/smallbus.html

The major expense of most businesses is payroll, which has to be kept in cash. The FDIC insures business accounts only up the same $250,000 as personal accounts. Any sizeable business is going to exceed that by a large amount. (GM, for example, keeps $27Billion in cash and equivalents on its balance sheet.) If Bank of America went under, 12% of sizeable US businesses would not be able to issue paychecks or pay their creditors. Now think about the effects on their suppliers, their employees' mortgages and other bills, and the ripple effect throughout the economy. That is a recipe for catastrophe.

(3) Think about the effect on income taxes, business taxes, and other government revenue on top of FDIC payments and any necessary bailouts. The deficit would swell and it is likely that government services would be substantially cut and taxes raised. Just raising taxes on the top 1% would come nowhere near solving the issue -- all of would feel the pain in various ways.

(4) Federal employees would continue to be paid, since the US government can create money. State and local governments, however, cannot. Cities like Baltimore or Detroit ravaged by a fleeing tax base and higher costs know what it's like to have tax revenues plummet.

--------------

Many DUers complain about high unemployment, as they should. Multiply the current problems by at least 2-3 times to get an idea of the impact of letting these institutions fail. Same holds for concerns about the deficit.

As far as the perception that allowing widespread failure would result in a deeper but shorter recession, it is based on wishful thinking rather than economic analysis. The current recession is bad, but it's manageable and within the normal range recent recessions. The alternative is much, much worse for all of us.

It's unlikely that you are insulated from the effects of widespred bank failues and general economic conditions as you believe. Even if you were, wanting AIG to fail is wishing serious financial harm on hundreds of millions of people for your moment of schadenfreude.

As it is, AIG gave up 92% of its stock. The business owners lost their investment, the government took over, and the operation continued. This is the right type of solution. Now the government has to gradually sell the stock and return it to private hands with a minimal loss. I don't see how anyone can complain about that.

[mbperrin]

25. Yet I didn't believe it at that time and still don't.

And nothing has been done to prevent it from happening again. We need Glass re-instituted in full, for a start.

Since the Fed took on at least 9 TRILLION during this time, no reason they couldn't have done the same for the FDIC. I mean, they helped German banks, among others, so no reason that the American bank insurance couldn't have been covered.

I'm complaining because all risk is taken by the public and all profits are retained by the private. If the private business clearly does not know how to survive, the government buys it, restores it and sells it back for an iffy price based again on what the private sector wants to pay.

As long as we allow moral hazard like this, we will get more situations like this. You get what you incentivize for, and we are providing no reason for prudent business practice, conservatorship of assets, or even legal operations. Well, enjoy the ride. I'm old enough to be dead before it all completely comes down, but that does not mean I'm happy about it or will not try to improve the lot of future generations, but it is damned discouraging.

[brentspeak]

19. How would the system of payments frozen had AIG been allowed to fail?

AIG's role in maintaining the financial system's cash liquidity was dubious -- other than it owed Goldman, Chase, etc. billions. And we know for a fact that cash-flush Goldman, for one, never needed any insurance payouts from AIG whatsoever.

Actually, the system of payments never needed a living, breathing Goldman Sachs to exist, either. I believe we was robbed.

[Rage for Order]

21. No doubt. Thank goodness for the vision of George W. Bush!

:eyes:

[On the Road]

2. dupe

[chollybocker]

3. See? Those billions in year-end bonuses to CEO's are finally paying off!

"Un fait acompli!", they smirk, then something about "manger gâteau."

[Demeter]

6. "In Full" in What Way?

Pay no attention to the accountants behind the curtain--buy the propaganda and eat the S***.

It's not possible to make this claim with a straight face.

There are so many leaks that the Fed and Treasury plugged with wads of cash, most of which are never publicized, and that will never be repaid. TARP is the smokescreen behind which a lot of criminal activity occurred in unnamed and unspun serial bailouts.

[IScreamSundays]

11. I just spit my cereal out all over my keyboard...

Haaahahahahahah. Too funny. Recapitalization!?! You mean the Federal Reserve Bank gave them some QE2. They're a freaking CIA front ala 9-11.

[faz]

13. OK so let's wait for the next screwup

That always happens for greedy bastards.

[melm00se]

16. the big question on everyone's mind

should be:

What are they going to do with the money?

Clawdown the deficit?
Fuck it up?

[DCBob]

24. It would be interesting to see some of the posts on this site from about year or so ago claiming...

we would never see a dime paid back from AIG.

[SOS]

26. Is something askew here?

Total expended on AIG bail out: $127.4 billion.

AIG asset sales paid to US: $21 billion

AIG market cap: $36.3 billion x 92% = $33.9 billion

$21 billion + $34 billion = $55 billion

So how exactly is paying $55 billion on $127 billion "payment in full'?

Either something is missing here, or it's the usual Wall Street/Enron accounting at work.