American International Group Inc. (AIG) is looking to buy back a large amount of its shares from the government, according to people familiar with the company's thinking, in a push that could make the U.S. a minority shareholder by the fall and enable the insurer to fully repay its bailout sooner than expected.
Bringing the government's current 61% stake to below 50% would be a victory for AIG and its management team. But it could bring the additional headache of tough oversight from the Federal Reserve, which is expected to regulate the company when the U.S. is no longer a majority owner.
AIG, which was effectively nationalized by the government four years ago as part of a controversial financial-industry bailout, has been accumulating billions of dollars in cash that it can use for share repurchases and other activities.
Several analysts who follow the company say the government's stake could be cut below 30% before the November elections, if asset sales expected by AIG in the coming months help the company raise a total of $10 billion to $15 billion in excess capital.
The buybacks are likely to accompany one or more public share offerings of AIG stock by the Treasury, which over the past 16 months has reduced its stake from a peak of 92% through a series of at-market sales.
The timing and scale of future offerings and repurchases aren't clear. That will be determined by factors including AIG's share price, which has risen 33% this year and is above the point at which the government breaks even on stock sales, and how global markets hold up amid the euro-area debt crisis and fears of a global economic slowdown, according to people familiar with the matter.
The U.S. will be permitted to sell more shares this week, after AIG reports second-quarter results Thursday. Spokesmen from AIG and Treasury declined to comment.
Reducing the government to a minority shareholder would be a significant achievement for AIG Chief Executive Robert Benmosche, who has pledged to repay taxpayers in full, plus a significant profit, and return the company to independence. AIG in September 2008 received a record bailout from Treasury and the Federal Reserve that swelled to include up to $182.3 billion in funds to support the company, though not all the money was used. As recently as a year ago, the full repayment was expected to take several years.
In an interview with The Wall Street Journal in June, Mr. Benmosche said a series of future asset sales could mean that by the fall, AIG will have enough cash on hand that "we could purchase a large quantity of the overhang of Treasury's stock."
The insurer recently unveiled a rebranding effort that will kick into high gear this fall and reapply the AIG name to its insurance divisions, which abandoned the name after the bailout sparked public outrage nationwide. Over $152 billion in federal assistance to AIG has been repaid or canceled because it wasn't used, and $30 billion in aid remains outstanding in the form of Treasury's majority stake in AIG, which is to be sold completely over time.
On Wednesday last week, Treasury Secretary Timothy Geithner said in congressional testimony that the government plans to sell "as much [of AIG] as we can, as soon as we can, because we want nothing more than recovering that taxpayer's money."
The repayments so far to Treasury and to the Federal Reserve Bank of New York, which made various loans to support AIG during the crisis, have so far generated $14 billion in profit, and total gains could exceed $18 billion by this fall, according to government data and estimates of what the Fed could collect.
That means U.S. taxpayers could be made whole on the AIG bailout later this year after Treasury recoups another $12 billion from selling AIG shares. Taxpayers could reap billions of dollars in profit with further share sales.
One factor that may influence the timing and size of the next share sale is what happens after the government's stake in AIG falls below 50%. In its last annual report, AIG said it expects to become regulated by the Fed as a savings-and- loan company when Treasury ceases being a majority shareholder, because it owns a small thrift. AIG said it would become subject to "stress tests" conducted by the Fed that would determine whether it has sufficient capital to withstand an economic downturn.
Analysts say there is a risk that the Fed could limit AIG's use of cash to buy back stock. "The question is, does AIG care about being Fed-regulated?" said Josh Stirling, an analyst at Bernstein Research.
Jay Cohen, an analyst at Bank of America Merrill Lynch, said in a report that the next transaction by AIG and the Treasury could take the government's stake down to just above 51%, and a second deal later could substantially reduce U.S. ownership.
Meanwhile, AIG is piling up cash. The company recently received about $6 billion after the New York Fed sold troubled mortgage securities from the insurer's bailout. The company could collect another $2 billion in the coming weeks if the regional Fed bank finishes selling its remaining toxic assets.
In early September, AIG will be free to sell its remaining 19% stake in pan-Asian life insurer AIA Group Ltd. (1299.HK), which is currently valued at over $7 billion.