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Treasury Likely to Wait on AIG Sale

Source: WSJ - Serena Ng

Posted on 31 Oct 2011

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The Treasury Department is likely to put off its second sale of shares in American International Group Inc., the insurer bailed out by the U.S. government during the financial crisis, because of unfavorable market conditions, according to people familiar with the situation.

The Treasury, which owns a 77% stake in AIG, sold a first chunk of shares to investors in May, before financial stocks tumbled amid fears of a double-dip recession in the U.S. and a market shock tied to the prolonged European debt crisis. The U.S. government's next opportunity to offer more shares for sale will come later this week, after AIG reports quarterly earnings Thursday.
Government officials are expected to hold on to the shares and wait for better conditions, according to people familiar with the matter. AIG shares have

lost nearly half their value this year, pushing the stock below the level at which the Treasury can sell its shares without realizing a loss for U.S. taxpayers. AIG Chief Executive Officer Robert Benmosche has repeatedly pledged to earn taxpayers a profit on the AIG bailout.

The likely decision by the Treasury, led by Secretary Timothy Geithner, underscores how the recent stock-market turbulence is complicating Washington's plans to exit from some of the most controversial crisis-time investments. Other bailed-out firms include General Motors Co. and Ally Financial Inc., formerly the auto maker's lending arm.

The government made more than $182 billion available to support AIG during the crisis, along with about $50 billion for GM and $17 billion for Ally. The bailouts left the Treasury as the biggest shareholder in all three companies —a position it retains almost three years later, with 74% of Ally and 26% of GM.

Ally, now a bank and consumer lender, has twice pushed back its plans for an initial public offering, and the government has delayed plans to sell the rest of its ownership in GM, whose shares have fallen 28% this year.

The delays create a tricky balancing act for officials, who want to quickly reduce government involvement in private companies while protecting the interests of taxpayers who funded the controversial bailouts. If demand for the companies' shares remains soft, the Treasury Department may face a tough choice: remain a large shareholder of American corporations for years or change tack and sell its stakes at whatever price it can get, forcing taxpayers to shoulder losses.

While the Treasury is in no rush to dump its stakes and has shown it doesn't have to sell at every opportunity, waiting could mean it may not fully exit from these investments before the 2012 elections.

"It was never expected to be easy for the government to get out" of companies it rescued, says George Smith, a professor at New York University's Stern School of Business.

The Treasury has to date recouped the bulk of its bailouts, or roughly $316 billion of the nearly $411 billion it invested in banks and private companies through the Troubled Asset Relief Program. The U.S. government has exited from large investments in companies such as Bank of America Corp., Citigroup Inc. and Chrysler Group LLC, reaping profits on the sale of its stakes in the two banks.

The potential share-sale delays could give the government-owned companies more time to sell assets or take other steps that might improve the value of their businesses in the eyes of investors before the Treasury tries to sell more shares.

AIG, for example, is preparing to sell shares to the public in its aircraft-leasing unit and could sell off another piece of its stake in pan-Asian life insurer AIA Group Ltd. in the coming weeks. GM is trying to reduce its pension obligations and to launch its own business lending to car dealers.

Ally Financial has contemplated a restructuring that could separate its money-losing mortgage operations from its other consumer-lending businesses or that would limit losses from its precrisis mortgage activities, according to people familiar with the matter.

But the likely AIG delay shows the size of the challenge facing the U.S. government as it tries to unwind what is left of the financial support doled out during the crisis. Treasury officials have sold $5.8 billion in AIG shares and are hoping to recoup at least $41.7 billion more from selling the rest of the U.S. government's stake in the insurer.

Not wanting to sell its remaining AIG shares at a loss, Treasury officials are inclined to wait for better market conditions before attempting another large offering, say people familiar with the matter. No timetable has been set for a sale or a decision on its timing, the people add.

The goal of Treasury officials is still to help taxpayers profit from the record bailout by selling AIG shares over time for a higher price than the $28.73 apiece that the U.S. government effectively paid for them, according to the people. AIG shares traded around $20 in early October but have bounced back and closed Friday at $26.34. That is still down 7% from their offering price this past spring and more than 40% below the company's book value, or reported net worth.

The government's reluctance to sell shares at depressed prices has pushed some companies to devise alternatives. Treasury officials earlier this year shot down an idea by GM for the Treasury to sell its stake back to the auto maker, which is eager to cut ties with the government.

The administration is weighing the idea of selling shares more gradually, to avoid a disruption of the market that could result from a major sale, people familiar with the matter said. If the Treasury were to sell its GM stake at current levels, the U.S. would lose about $13 billion on the auto maker's bailout.

AIG executives have also considered a stock buyback, but that is seen as unpalatable as long as the insurer's shares are trading below the Treasury's break-even point, other people familiar with the matter said.
Ally, which in March filed plans to go public, has been weighed down by its mortgage-finance business, a debt-heavy unit known as Residential Capital.

While auto lending had few problems even during the worst of the financial crisis because consumers generally kept paying their car loans, ResCap has been plagued by losses, lawsuits and regulatory inquiries into its earlier subprime home-lending activities.

Ally's IPO has been waiting in the wings as financial stocks have been the worst-hit sector in the stock market this year, according to the Capital IQ unit of Standard & Poor's. Since March, bank stocks have fallen from an average of 116% of book value to a current 91%, according to Keefe, Bruyette & Woods, and some bankers and analysts speculate Ally might fetch just 60%.

Ally has explored ways of "ring-fencing" its mortgage liabilities to improve its current financial picture, according to people familiar with the bank. But some people close to the company are skeptical that such an effort could be successful. In its disclosure of risks in its IPO prospectus, Ally warned that ResCap may not be able to survive on its own.