With hopes of paying back feds, AIG agrees to huge stock swap

McClatchy NewspapersSeptember 30, 2010 

WASHINGTON — Insurance giant American International Group, which has been taxpayer-owned since a $182 billion federal rescue two years ago, announced a deal Thursday allowing the firm to convert the government's ownership to 1.6 billion shares of common stock.

The agreement, if consummated, would free AIG of a huge debt burden and transfer a new form of risk to taxpayers who currently hold preferred stock in the company and a 79.8 percent ownership stake.

It remains to be seen whether Thursday's conditional accord will heighten prospects for taxpayers to eventually recover the $134 billion currently loaned to AIG or whether they'd be saddled with major losses if the company stumbles in its turnaround efforts and the value of its heavily diluted shares drops.

As preferred shareholders, taxpayers stood to be among the first creditors to recover assets if AIG went bankrupt. AIG was freed in the spring of 2009 of the $1 billion-a-year in dividends due to taxpayers on the preferred stock, an important concession for the company as it sells assets to repay the government.

AIG, once the world's largest insurer with annual revenues of about $1 trillion, said it's reached an "agreement-in-principle" on the restructuring plan with the Federal Reserve Bank of New York and the Treasury Department.

In a series of loans to the insurer since the financial crisis hit in September 2008, the two agencies accepted preferred stock and other collateral, including risky home mortgage securities on which the New York Fed says it expects to wind up with a profit.

Treasury Secretary Timothy Geithner hailed the agreement, saying that it "dramatically accelerates the timeline for AIG's repayment and puts taxpayers in a considerably stronger position to recoup our investment in the company."

White House Press Secretary Robert Gibbs said Thursday that the government stands to reap a $20 billion profit on the deal.

AIG's chief executive, Robert Benmosche, called it "a pivotal milestone as we deliver on our long-standing promise to repay taxpayers."

Word of the agreement sent AIG's shares $1.42 higher Thursday, to $38.87.

Under the agreement, a $1 billion profit for the company would amount to per-share earnings of 43 cents on the 2.3 billion shares that would then be outstanding.

The new arrangement is conditioned on AIG completing the sale of two prized foreign assets, the Asia-based American International Assurance Co. and the American Life Insurance Co. AIG would use the proceeds to repay the New York Fed the $20 billion owed under a $35 billion credit facility and to terminate that loan agreement.

Those AIG liabilities would shift to the Treasury Department, which would lend the insurer about $22 billion remaining on a separate, $29.8 billion credit line. The Treasury loan was extended under the Troubled Asset Relief Program, created in late 2008 to bail out financially ailing banks and systemically important institutions.

In a complicated series of transactions, AIG would use the money to shift from the Fed to the Treasury interests in the two foreign subsidiaries it hopes to sell. MetLife has tentatively agreed to acquire ALICO later this year and AIG is making a public offering for AIA because London-based Prudential PLC backed away from a tentative deal to acquire it last spring.

The Treasury Department currently controls $49.1 billion in preferred shares in AIG. The company says it will swap the preferred shares for 1.655 billion shares of AIG common stock, giving the government 92.1 percent ownership of AIG and enabling the Treasury Department to sell its stake on the open market over time.

AIG also plans to issue up to 75 million warrants to existing shareholders, who could trade each warrant for one share of company stock at the price of $45, another vehicle for generating cash, but one that hinges on the company's shares gaining value.

AIG lost $110 billion in 2008 and 2009, with much of the red ink stemming from a London unit's sale of over $80 billion in credit protection to major U.S. and European banks on risky mortgage securities that soured.

The insurer has reported operating profits during the last few quarters.

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