AIG chief says the firm is on ‘clear path’ to repaying bailouts
American International Group Inc., the much-derided prime example of Wall Street excesses during the financial crisis, could end up doing what many thought was impossible: repaying most, and maybe all, of the $132.3 billion in taxpayer funds used so far to bail it out.
Company executives and federal officials testified Wednesday at a hearing by the government watchdog commission overseeing the bailouts that the giant New York insurer was regaining some of its financial strength, making the prospects for full repayment look brighter.
But members of the Congressional Oversight Panel, who criticized the government decision to bail out AIG in the first place, were skeptical.
Chairwoman Elizabeth Warren noted that despite “this enormous optimism,” AIG still has been unable to pay dividends on the 80% of its stock owned by the federal government.
And Clifford Gallant, an insurance industry analyst at Keefe, Bruyette & Woods, told the panel that he was dubious of AIG’s prospects. He values its stock at $6 a share, far below Thursday’s closing price of $34.05.
“It will be difficult for the taxpayer to break even,” Gallant said.
Nevertheless, Chief Executive Robert Benmosche declared: “I am confident AIG is now on a clear path to repaying the taxpayers.”
The top Treasury official overseeing AIG was less confident but said the company was making “significant progress.”
“Whether we get all of our money back remains an open question,” said Jim Millstein, the department’s chief restructuring officer.
The Office of Management and Budget has estimated the AIG bailout would cost taxpayers $50 billion, and the Government Accountability Office has put the cost at $36 billion.
Still, Millstein expressed optimism. He said it was “very likely” AIG would repay the entire $83 billion it owes the Federal Reserve if recently announced deals to sell its two largest international subsidiaries, American International Assurance and American Life Insurance Co., go through.
The recovery of $49 billion owed to the Treasury Department as part of the complicated AIG bailout is more questionable. That money is largely tied up in preferred stock of the company, and the stock’s value will depend on continued efforts to resuscitate the company.
The company’s repayment efforts have long been predicated partly on its ability to sell many of its lucrative businesses.
But less certain are prospects for selling International Lease Finance Corp., the Century City aircraft leasing subsidiary. Though it has been on the block for a year, AIG recently appointed a former Airbus executive, Henri Courpron, as president and CEO.
The appointment of Courpron, who replaced founder Steven Udvar-Hazy, indicated that AIG doesn’t want to let go of one of the world’s largest plane leasing firms at what would now be a fire-sale price. Though ILFC has been hit recently by the departures of several high-profile executives, it has raised about $4 billion in new debt securities.
Benmosche, who took over as AIG’s CEO in August, touted the improved performance of subsidiaries such as SunAmerica Inc. in Los Angeles for helping the company post a first-quarter profit of $809 million.
SunAmerica, which sells retirement annuities, reported $1.1 billion in operating income in the first three months of the year, compared with an operating loss of $160 million for the same quarter last year.
Congress created the oversight panel to supervise the $700-billion Troubled Asset Relief Program that bailed out mainly financial institutions during the darkest days of the credit crisis and recession in late 2008 and early last year.
The likelihood for recovering TARP funds has been improving. Last summer, the Obama administration estimated $341 billion in losses from the fund. But most large banks have repaid the money they received, and the government has been selling stock and stock warrants it received as part of the bailouts, often at a profit.
This month, the Treasury Department lowered the estimated loss from TARP to $105.4 billion, $11.4 billion less than it predicted this winter.
AIG was rescued by a combination of Federal Reserve loans and TARP money in a series of commitments starting in September 2008. U.S. officials feared that the company’s impending collapse could turn the financial crisis into a full-blown global panic.
At its height, the government made more than $182 billion available to AIG, including $70 billion from TARP, the largest outlay to a single company.
Fed officials echoed Millstein’s view that their portion of the bailout would be repaid in full. They also said they did not believe AIG would need the remaining $50 billion originally committed to it. AIG also has a $35-billion line of credit with the Fed, reduced from $60 billion, that it has not fully tapped.
“I think right now they are on … a path of repayment,” said Scott Alvarez, the Fed’s general counsel.
Members of the oversight panel were as concerned about the government’s decision to rescue AIG as they were about the prospects for repayment.
AIG’s downfall was caused by about $500 billion worth of insurance against housing price declines it provided to banks and other financial institutions through complex instruments called credit default swaps.
Warren called the company “a corporate Frankenstein, a conglomeration of banking and insurance and investment interests that defied regulatory oversight.”
She and others on the panel criticized government officials for not realizing earlier that AIG was in deep financial trouble and that its failure could affect so many other firms worldwide.
They also slammed the decision by the Federal Reserve to bail out AIG without requiring large holders of the credit default swaps, such as Goldman Sachs Group Inc., to take less than what they were owed.
But Fed officials defended the decision, saying AIG’s rapidly deteriorating position just days after the market chaos caused by the bankruptcy of investment bank Lehman Bros. could have ignited a worldwide financial meltdown.
“There were no other realistic options,” said Thomas C. Baxter Jr., general counsel of the Federal Reserve Bank of New York.
