Slashing its stake by more than half and making the government a minority shareholder for the first time since the financial crisis was roaring in September 2008, the Treasury Department said it would sell $18 billion of American International Group Inc. stock in a public offering,
The sale will mark a step that seemed hard to imagine four years ago, when the New York insurer was effectively nationalized as part of a controversial financial-industry bailout. The U.S. will move closer to recognizing a profit on its largest rescue, which included as much as $182 billion of committed aid, and AIG will revert to being mostly nongovernment-owned, fulfilling a priority of Chief Executive Robert Benmosche.
U.S. officials four years ago said the rescue of a teetering AIG was necessary because the company was so entangled with other financial firms around the world via complex instruments that its collapse could have unpredictable effects including possibly bringing down many other firms.
But the fury spawned by the rapid series of bailouts, typified in some ways by that of AIG, would eventually run wide. The government's extraordinary intervention in the economy helped seed the tea-party movement on the right. On the left, it helped spawn the Occupy Wall Street movement, which among other things contended the government propped up bankers but did less for struggling homeowners.
A near-exit by the government from one of the most controversial bailouts is both a significant accomplishment for the Obama administration and a sign of how far the markets have come in four years, thanks in part to the rescue of financial companies and the Fed's efforts to support the economy by reducing interest rates.
But the sale could also renew complaints that Treasury still hasn't outlined a concrete strategy for exiting other large financial-crisis investments, such as those in mortgage investors Fannie Mae and Freddie Mac FMCC -1.69% and lender Ally Financial Inc. The government remains in the red on its investments in Fannie and Freddie, which have received $188 billion in taxpayer support. The U.S. continues to hold sizable stakes in General Motors Co. GM -0.51% and Ally that it spent $68 billion on and may not fully recover.
In addition, the AIG sale could raise questions about timing, coming less than two months before a closely contested presidential election.
"Anything that happens between now and the election will seem to some to have political motivations," said James Angel, finance professor at Georgetown University. "But either way, the fact that AIG is in good enough shape to buy back shares is excellent. And the deal also shows that the government is getting out of the business of owning large stakes of companies."
A Treasury official said the timing had nothing to do with the political season.
The public offering of AIG shares will be Treasury's fifth sale of share since May 2011 but its largest, potentially leaving the government with less than a 20% stake in the insurer, depending on the offering's pricing. The Treasury's stake already has fallen to about 53% from 92%.
AIG will repurchase up to $5 billion of its shares as part of the offering, the Treasury said. The company has been repurchasing shares to use cash on hand and reduce shares outstanding, a move that boosts earnings per share.
"It's part of our ongoing efforts to exit the investment in AIG, recover taxpayer dollars and wind down" the crisis-era Troubled Asset Relief Program, a
Treasury official said. An AIG spokesman had no comment on the size of the sale or the timing for its completion.
Treasury chose Citigroup Inc., C +0.97% Deutsche Bank Securities Inc., Goldman Sachs GS -0.42% and J.P. Morgan Securities LLC to lead the offering.
Like most large stock sales, it is expected to be priced below the recent market price. The lower the price, the more shares the government will likely sell, further bringing down its stake. AIG shares, down 23 cents on Friday to $33.99, have risen 47% this year. AIG shares have fallen more than 95% from their levels in the year before the rescue.
AIG has haunted the federal government ever since its rescue, just a day after Lehman Brothers Holdings Inc. toppled into bankruptcy.
The AIG rescue and the Federal Reserve Bank of New York's purchases of mortgage securities that AIG previously owned or insured saw tens of billions of taxpayer aid flow from the insurer to banks in the U.S. and overseas. The New York Fed's moves were criticized in some quarters as a backdoor bank bailout that exposed U.S. taxpayers to undue risks.
In early 2009, the Obama administration misjudged the public outrage that boiled over after reports of large bonuses that were supposed to be paid to AIG executives, and struggled to contain the backlash.
But from the outset, Fed officials including Chairman Ben Bernanke said the U.S. was acting to protect the country from financial meltdown and expected to be fully repaid on loans provided to support AIG.
As of the last Treasury sale of AIG shares, the government had $24 billion of AIG-related investments outstanding, according to Treasury data, while the bailout of AIG had yielded over $18 billion in interest, fees and profits. With the coming sale of $18 billion in securities, the government by one measure can consider itself to have recouped the funds it extended on the bailout.
The government says it has already made a profit on the emergency funds injected into banks at the time of the financial-industry bailout, and the Fed has fully recouped money spent on acquiring toxic assets from troubled companies.
The Treasury, which invested $245 billion in more than 700 banks, has so far collected $264.7 billion from its bank programs.
The New York Fed, meanwhile, has fully recouped $72.7 billion in loans that were used to buy toxic assets and has reaped gains of more than $5.2 billion so far. The New York Fed last month sold the last toxic assets it acquired in the AIG bailout.
For its part, AIG has shed its most toxic assets and returned to profitability. But with the coming sale, AIG may have some new headaches.
In its latest annual report, AIG indicated it expected to become regulated by the Fed as a savings-and-loan holding company when Treasury ceases being a majority shareholder, because AIG owns a small thrift. The company said it might become subject to rules on leverage and risk-based capital.
Some Wall Street analysts speculated in notes to clients that the Fed could limit AIG's use of cash to buy back shares.
"To have a regulator like the Fed come in for the first time is certainly a step in the right direction," said Christy Romero, the special inspector general for TARP. In a July report to Congress on bailout programs, Ms. Romero's office warned that the U.S. financial system remains vulnerable to another crisis and urged regulators to toughen oversight.