Posted on 21 Sep 2010
The Troubled Asset Relief Program's (TARP) Congressional Oversight Panel has issued a report suggesting it's still hard to say whether that taxpayer investment in American International Group Inc (AIG) will pay for itself. The insurer still owes he federal government about $128.2 billion.
"Whether Treasury will be able to exit its investments in AIG without substantial losses turns on AIG's ability to produce strong operating results and demonstrate that it is capable of functioning as a stand-alone investment-grade company without government support," the report said.
An attempt to reach AIG for comment on the TARP report wasn't immediately successful.
"AIG still relies largely on government funding for capital and liquidity, although there are recent indications that AIG is planning to issue bonds," the report said. "Treasury's ability to recoup its investment depends on the value of AIG's common stock at the time Treasury sells its interests. Therefore, the value of Treasury's substantial investment in AIG and the size of any gain or loss are dependent on many external variables, and the protracted investment in AIG continues to create significant risks to taxpayers."
The company's outstanding TARP help equals $49.1 billion, while its debt to the Federal Reserve Bank of New York is $79.1 billion. AIG has to repay FRBNY before it can turn to settling its debt with the Department of the Treasury.
In general, the report reflected increasing optimism in the federal agencies that AIG may recover, but it points out the company has offered no concrete time line for debt repayment.
"At this time, AIG cannot afford to divert the cash it is generating through its insurance operations towards repaying FRBNY, because it is still quite weak financially," the report said.
"Both the timing of the government's exit from its involvement with AIG and the ultimate return on its investment are difficult to predict with confidence."
The panel's report also included views from academic experts. It quoted Alan Blinder, a professor of economics and public affairs at Princeton University, as saying that "regarding stabilizing institutions like AIG, one has to count TARP as a huge success." He said it threw a "security blanket around every large entity. This is not something you'd want to do under normal circumstances but was appropriate at the time. And the net cost to the taxpayers for this part of the program will, in the end, be very small. In that sense, TARP looks like a bargain."
Because Treasury will sell off the remaining warrant positions it holds in Hartford Financial Services Group Inc. and Lincoln National Corp., ending the financial connection between the two major insurers and the federal government, that leaves AIG as the only insurance company financially connected to TARP.
TARP is nearing its statutory expiration on Oct. 3.