Late last year, with AIG shares soaring and the initial public offering of General Motors Co. exceeding expectations, company and federal officials raised hopes that taxpayers would score big profits on the stake in the insurer that the government rescued at the height of the financial crisis.
Since then, the combination of disappointing 2010 financial results by AIG and the tens of billions of dollars in shares that the government needs to unload over time has dimmed prospects for the first stock sale, expected later this month.
AIG's publicly traded shares have lost over a third of their value since mid-January, even as the overall U.S. stock market has rallied strongly. The shares closed at $30.70 Friday in 4 p.m. New York Stock Exchange trading.
"People expect an offering to include some sort of a discount" from the current market price of AIG's stock "and that becomes a bit of a vicious circle," says Paul Newsome, an analyst at Sandler O'Neill + Partners. "Whatever price the stock is today, people think it's going to be lower than that, and as it falls, it keeps going lower."
In recent weeks, some investors have indicated to bankers that they would prefer to pay roughly $5 below the current market price for a large number of AIG shares, in part because they are skeptical about the company's growth prospects and expect the offering to be priced at a discount, as is typically the case in large share sales.
Treasury's break-even price on its AIG stake is about $28.70 per share.
The size of this month's offering has yet to be determined, and could be anywhere from $7 billion to $30 billion; some investors expect at least a $20 billion deal.
To be sure, potential buyers have an incentive to try to talk down the price so they can get the shares more cheaply. Bankers will get a clear sense of what the broad market thinks AIG is worth after the company's road show kicks off this week, and if investor demand is strong, Treasury could make a profit on its shares.
In late 2010, when AIG's stock was on a tear, the Treasury suggested U.S. taxpayers stood to make more than $20 billion in profits from the government's sale of its 92.1% stake in AIG. The outcome would make the controversial decision to bail out the insurer in 2008 a surprise winner.
Tim Massad, Treasury's acting assistant for financial stability, said in December "when all is said and done, we believe taxpayers will recover every dollar invested in AIG and stand a good chance of making a profit."
Analysts attribute part of the decline in AIG's stock over the past few months to a surprise announcement in February that AIG was raising estimated losses from insurance claims by $4 billion.
While the exercise helped clean up AIG's balance sheet, it spooked investors about the reliability of the company's earnings record and also caught some government officials by surprise, according to people familiar with the matter.
The government both invested in and loaned money to AIG under a $182.3 billion bailout, of which over $130 billion was used.
The sale of Treasury's majority stake will be used to pay off a $47.5 billion cash investment in AIG shares. Separately, AIG has paid back more than $40 billion, including roughly $6 billion in interest and fees, to the Federal Reserve and Treasury using proceeds from asset sales.
That, and expected profits from mortgage securities the Fed took on in the AIG rescue, means taxpayers could still end up making money from the AIG bailout even if Treasury doesn't break even on its sale of AIG shares.
In the coming share sale, investors are aware that Treasury officials are torn between wanting to fetch a high price and simply wanting to get out of the awkward position of owning a big insurance company. Within Treasury, the desire to show that the U.S. is on a path to exiting AIG completely is being weighed against officials' preference to sell the shares at a profit, people familiar with the matter say.
If the price most investors want to pay falls short of Treasury's break-even price, the government may elect to sell only a small amount of shares in this first sale, and wait for the market to improve before selling more, people familiar with the matter say.
What Treasury chooses to do with its AIG shares "is essentially a political decision," says Jay Ritter, a finance professor at the University of Florida.
"Government officials and politicians would like to say we broke even and didn't lose any taxpayer money" in the AIG bailout, he says.
"But as a taxpayer, I would be happy if we got out close to whole, and losing a little would ultimately be a good outcome" given the amount that was committed to the AIG bailout, Mr. Ritter says.
The commercial insurance sector, where AIG is a large player, has been mired in competition for years, resulting in many insurers collecting lower premiums. However, losses many insurers incurred in the Japanese earthquake and other disasters could enable some companies to begin raising premium rates, which could help their profits.
All sides are still pushing to make a profit on the AIG sale. Starting Wednesday, three teams of AIG's top executives are expected to travel to major cities in Asia, Europe and the U.S. and hold face-to-face meetings with scores of large and small institutional investors over two weeks. The stock offering is expected to be priced around May 24.
Investors were also skeptical before the sale of GM shares, but better-than-expected investor demand allowed Treasury and the company to boost the size of that deal.
Treasury suffered a loss on the GM shares it sold in the IPO, but the offering last fall was generally seen as a success, in part because it reduced the government's stake to 26.5% from 61%. The government is trying to recoup more money from the auto maker's rescue through more stock sales.