Posted on 25 May 2011
In a landmark stock offering on Tuesday, American International Group Inc. and the U.S. Treasury sold $8.7 billion in shares, which resulted in a small profit for taxpayers and began the government's exit from the insurer after its bailout in 2008.
AIG and the Treasury sold 300 million shares at $29 apiece, putting U.S. taxpayers in line to recoup at least $5.8 billion and reducing the government's stake in the insurer to 77% from 92%. More shares may be sold in the coming days, which could lower U.S. ownership in AIG to around 74%.
The sale price was slightly higher than Treasury's effective "breakeven" price of about $28.73 per AIG share, meaning the government reaped a profit of roughly $54 million on the first leg of its share sales. Officials had anticipated large profits for taxpayers last year when AIG shares were trading far higher, but recent weakness in AIG's stock left little room for the government to make money.
AIG shares have fallen around 40% since the start of this year. By the time they closed on Tuesday—down 52 cents, or 1.7% at $29.46 on the New York Stock Exchange—underwriters had to thread the needle to price the deal at a scant 1.6% discount to the market price while still securing a profit for the Treasury.
In a conference call Tuesday night, Tim Massad, Treasury's acting assistant secretary for financial stability, said the sale of AIG shares "is an important milestone of our exit" from the insurer. He said the actions the U.S. took to support AIG "weren't taken to make a profit," but helped avoid "catastrophic" damage to the economy during the financial crisis.
The share sale marks the first stage of the U.S. government's exit from the giant insurer, which was rescued in September 2008 from the brink of collapse after bad mortgage bets hobbled the firm. The Treasury and Federal Reserve committed up to $182.3 billion in taxpayer funds to support AIG as they feared a collapse would destabilize the whole financial system.
Treasury and AIG officials are hoping the share sales over time will ultimately recoup more than the $47.5 billion the U.S. effectively paid for its majority stake in the company. At Tuesday's prices, the implied profit on Treasury's overall investment in AIG is roughly $1 billion.
Mr. Massad said Tuesday that Treasury has no specific timetable to dispose of its remaining AIG stake but plans to sell the shares in an orderly manner and in a way that maximizes value for taxpayers. He added that whether the government will ultimately profit on the whole investment will depend on market conditions.
With 1.4 billion more AIG shares to dispose of over at least the next year, and roughly $80 billion in federal assistance to the insurer still outstanding, it will be months—if not years—before taxpayers will know if they profited from the record AIG bailout. Besides the share sales, other bailout funds are to be recouped from asset sales and cash flows from mortgage securities on the Fed's balance sheet. AIG has already paid back a Fed loan with interest.
AIG is aiming to return to independence in 2012.
The AIG offering is being led by Bank of America Corp.'s Bank of America Merrill Lynch, Deutsche Bank AG, Goldman Sachs Group Inc., and J.P. Morgan Chase & Co. Their fee of roughly 0.5 percentage point for the offering is low, reflecting the U.S. government's role in the deal. Most big initial public offerings carry fees of closer to 3%.
AIG earlier this month said it is covering the Treasury's costs of disposing of all its AIG shares, including bankers' fees, a cost it estimated at $385 million.
Tuesday's share sale capped a tumultuous 12 months for AIG, which has faced multiple setbacks in its efforts to repay taxpayers but managed to stabilize its insurance businesses and in September unveiled an agreement to end U.S. aid sooner than expected.
Of the 300 million shares sold Tuesday, 200 million were from the government and 100 million shares were issued by AIG, which raised $2.9 billion, before fees, to bolster its capital and pay $550 million for a settlement it reached last year over a long-running securities lawsuit. The Treasury can sell an additional 45 million shares in the coming days if underwriters exercise an option in response to investor demand, which would bring the total deal to about $10 billion in size.
Following this sale, the Treasury will be restricted from selling more shares for about four months. The government can sell shares in two public offerings per year, and may also dribble out smaller amounts of shares in the market if conditions allow.