AIG restructuring: Can taxpayers recoup bailout funds?

In all, AIG reported a nearly $9 billion loss for the fourth quarter of 2009, and $11 billion in losses for the full calendar year.

That’s about 1/10th the amount AIG lost the year before. So the company at least appears to be making progress, many financial analysts say.

But will taxpayers ever get their money back? That remains far from clear. (Read here to learn about another company that vows to repay its bailout money by June 2010.)

One risk is that federal support encourages AIG to gamble on its recovery plans. If those efforts succeed, the firm can pay back the bailout money and return to private-sector health with gains for its shareholders and employees – the ones who recently got $100 million in controversial bonuses. If the strategy falters, the firm could still win by leaning on the government for more assistance.

That endless-bailout scenario has some critics saying the government should press AIG to sell more assets, and faster, to repay taxpayers. The firm has been paring the size of its derivatives portfolio, but the package of $940 billion in contracts is still more than half the size it was at the end of 2008.

Others defend AIG’s don’t-rush approach to asset sales under CEO Robert Benmosche. “The sale of the Asian life unit is obviously a very positive step” in raising money that can be used to pay back bailout funds, says Cathy Seifert, an equity analyst at Standard & Poor’s in New York.

To date, the US Treasury has invested $47 billion to become 80 percent owner of AIG. Meanwhile, AIG owes the Federal Reserve $25 billion on an emergency line of credit. The Federal Reserve Bank of New York has also bought more than $30 billion in AIG assets to prop up the firm. AIG plans to pay down a large chunk of its obligations to the Fed with proceeds from the Asian unit.

The proceeds from the spinoff of Alico and the Asian insurance arm (called AIA) will come in a mix of cash and securities. Most of the money will be used to pay back additional Federal Reserve aid (so-called "special purpose vehicles" set up for those overseas units of AIG). The rest will go toward paying down the $25 billion loan on the Fed's books.

Bruce Ballentine, a credit analyst at Moody’s in New York, expects several steps to determine how US taxpayers fare in the end. First, he says, AIG will try to enhance the performance of core operations that it plans to keep. Second, the firm will continue to divest noncore assets or “de-risk” them. Third, he says, assuming that the Fed is paid back, the most likely path for the US Treasury would be to convert its stake in AIG into common stock and offer it for sale.

To Mr. Black, who oversaw fraud prosecutions of lenders involved in the 1980s savings-and-loan crisis, the public should have a bigger concern than getting its money back: Is the financial system being made safer? New regulations and tougher accounting standards, drawing lessons from AIG, could be vital steps down that path, he says.

Previous

1 | 2