American International Group is on its way to repaying government bailout money, its chief executive said on Wednesday, but a Treasury official warned taxpayers could still face losses.
AIG is operating with $132 billion in government support after being rescued by the government in 2008 and early 2009 on fears that an uncontrolled bankruptcy would trigger a broad collapse of the global banking system.
AIG is now on a clear path to repaying taxpayers, AIG Chief Executive Robert Benmosche told a panel overseeing U.S. bailout efforts. In recent months, we have become less reliant on government aid and have been able to instead tap the capital markets.
Benmosche and a senior U.S. Treasury official told the Congressional Oversight Panel that AIG's pending deals to sell two international life insurance units would allow AIG to fully repay some $83.2 billion in Federal Reserve loans and investments, and Benmosche said taxpayers would eventually earn an appropriate profit.
But the Treasury's chief restructuring officer, Jim Millstein, told the panel that a full recovery for taxpayers remained uncertain and a prominent insurance analyst said AIG could not survive without government support.
The Treasury Department holds about 80 percent of AIG's common equity and some $49.1 billion in AIG preferred stock.
The government assistance for AIG spurred a virulent public backlash when it emerged early last year that executives of the failed firm were paid generous bonuses and that big AIG clients such as Wall Street giant Goldman Sachs were spared from losses in deals with the insurer.
LOOKING FOR VALUE
Millstein told the panel that at current market prices, the Treasury's common equity stake in AIG has value that will inure to the taxpayers benefit, but recovery on the preferred stock is uncertain. AIG shares ended 1 percent lower at $34.05 on Wednesday.
Clifford Gallant, a managing director at financial analysis firm Keefe Bruyette and Woods, said AIG cannot yet fully access debt markets on its own. He recommends against buying its shares and has a stock price target of just $6 -- a level that reflects pressure from selling off the government stake.
If the government were to walk away today, and withdraw all of its support, (AIG) would not be in a position to conduct business, Gallant told the panel.
Benmosche, however, painted the picture of company moving toward recovery.
He reaffirmed his commitment to completing the sales of AIG's international life insurance units American International Assurance and ALICO by the end of the year for a total of about $51 billion -- a key benchmark in his goal of repaying taxpayer funds.
However, he noted that until the Fed is paid in full, AIG may from time to time draw on its Fed credit line to shore up capital at its core U.S. property/casualty and life insurance and aircraft leasing units.
Once the Fed is repaid, AIG will talk to the Treasury about options to sell off its stakes, he said, adding that that AIA and ALICO sales could allow AIG to earn $6 billion to $8 billion after taxes in 2011, excluding any special charges.
Shareholders of Britain's Prudential Plc are due to vote on their firm's proposed $35.5 billion acquisition of AIA on June 7, but an influential shareholder voting advisory firm, RiskMetrics, has recommended they reject the deal due to is high price.
Millstein, asked after the hearing how the Treasury would respond if the AIA deal was voted down, said returning to a previous plan for a Hong Kong initial public offering for the unit was a very viable alternative.
LOOKING TO SELL
Millstein said the government would seek to sell its stake as soon as practicable after AIG boosts its credit rating to single-A status. AIG is currently rated one notch lower at A-minus by Standard and Poor's, with a negative outlook. Assuming no government support, S&P rates AIG at BB.
He also said AIG had reduced its risk by slashing its exposure to credit default swaps to $136 billion from about $400 billion.
Two officials from the New York Federal Reserve Bank appearing before the panel defended their controversial decision to pay off AIG's credit default swap counterparties in full, saying they did not consider making emergency lending to AIG conditional on the company negotiating concessions.
(Additional reporting by Kristina Cooke in New York and Mark Felsenthal in Washington; Editing by Kenneth Barry)