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AIG Looks to Repay Government, But Will Taxpayers Break Even?

September 30, 2010 at 4:40 PM EST
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Insurance giant AIG and the U.S. Treasury unveiled a plan to speed up the repayment of more than $100 billion in federal bailout money. Ray Suarez talks to economic writers Roben Farzad of Bloomberg Businessweek and Louise Story of The New York Times about what this means for taxpayers, the economy and the company.
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RAY SUAREZ: The federal government and the bailed-out insurance giant AIG announced a deal today for the company to pay back the bulk of its massive debt to the Treasury.

At the height of the financial crisis, the Treasury and the Federal Reserve agreed to spend more than $180 billion if needed to rescue the company. AIG ultimately received more than $130 billion. It still owes over $100 billion. Under the plan, the U.S. Treasury will gradually sell off its majority stake of the company. AIG will also sell more of its insurance units to repay the Treasury.

In an audio recoding on AIG’s Web site, the company’s chief executive, Robert Benmosche, predicted, taxpayers would ultimately come out ahead.

ROBERT BENMOSCHE, CEO, AIG: This plan adheres to the basic commitment we made on September 16, 2008 that AIG would fully repay taxpayers. And I strongly believe, given how powerfully AIG and its businesses have rebounded, that we will repay the taxpayers with a profit.

RAY SUAREZ: For a closer look at what shape the government and the company might find themselves in as they emerge from this unusual union, we turn to two financial writers who have followed the story closely going back to the early days of the financial crisis.

Roben Farzad is senior writer at “Bloomberg BusinessWeek” magazine, and Louise Story covers Wall Street for The New York Times. And, Louise, you met with Treasury officials in just the last few hours before the program. How did they explain the deal to you?

LOUISE STORY, The New York Times: Well, I spoke with some on the phone. And what I understand they were trying to do was balance the interests of both the company, because there are public shareholders out in the markets that own some AIG, with that of the taxpayer.

Of course, you know, this is the company where the taxpayer really got the biggest stake. Of all the financial companies, this is the company where the taxpayer owns the most. After this deal, the taxpayer will own 92 percent of the insurance giant.

RAY SUAREZ: And how will those shares be priced once the government decides to sell them off in the open marketplace to get itself out of the AIG-owning business?

LOUISE STORY: Well, that was the huge negotiating part for AIG and the government. Over the past few weeks, they have been working night and day to agree on what AIG is worth, because the dollar value they used to convert the government’s preferred shares into common stock puts a value on AIG.

And so people today that I have been talking with have actually been kind of debating. Some people say that this puts a value of $45 per share on AIG. Some people say $29 per share. And the debate centers around whether you count the shares the government already had going back from two years ago from the Fed loan to AIG. So you can argue it both ways.

The thing that’s really important is that the taxpayer got these shares. They’re paying at least $29 a share for it. And so, over the next many months and years, the taxpayer is going to have to be able to share — sell these shares for more than $29 to make any sort of profit.

RAY SUAREZ: Roben, as AIG converts from preferred shares to common shares, this U.S. government stake, doesn’t that expose the U.S. taxpayer to even more downside risk than they had before?

ROBEN FARZAD, senior writer, “Bloomberg BusinessWeek”: The idea is not for the government to sit out there and be a mutual-fund-like holder of these common shares. I mean, they’re not portfolio managers out there.

They did this holding their nose and dragging their feet. They’re looking to sell the shares in an orderly manner, but then in an expeditious manner. I mean, look, they want to off-load this stuff and get hard cash back. It’s a huge black eye, I mean, the September 2008 kind of gun-to-the-head negotiations, with the entire economy at the brink.

And I think it’s critical for Treasury to have this type of a symbolic victory, but I disagree with what Robert Benmosche said in the recording there. I think it’s incredibly deceptive to think that the taxpayer and the system is going to be made whole with even $100 billion or $150 billion paid back.

Truth be told, I mean, this exposed the entire systemic rot that was happening. And the government, and the Federal Reserve, and the Treasury, and the New York Fed have stepped in and taken unprecedented measures at multiples the $180 billion bailout sticker price.

You still have the Federal Reserve pursuing quantitative easing, which is going out there and actually conjuring money out of thin air to buy toxic assets, the very likes of these assets that were backed and insured by AIG.

So, while it might make sense from a headline perspective — yes, the taxpayer is going to make potentially a profit on the $130 billion or $140 billion going out three or four years — it’s certainly cold comfort for an economy that’s lost trillions.

RAY SUAREZ: Well, Louise, you just heard Roben sounding pretty skeptical. What price would those shares have to sell at in order for the taxpayer to even break even? Is it much higher than the shares are trading right now?

LOUISE STORY: You know, it’s — it’s just below where the shares are trading, so they need to sell them for $29 a share.

But the problem is, the government owns almost the entire company. It’s kind of like, if you owned 92 homes in a neighborhood that had 100 homes, and you wanted to sell all those homes. But every house you put on the market is going to affect the price of the other houses, potentially.

And so the government is going to have a very tricky song and dance, where they have to slowly sell this, so they don’t drive the price down too much, because they have got all those other shares to sell.

RAY SUAREZ: Well, Louise, let’s reel back a little bit and remind people how the federal government ended up owning those 92 homes in the first place. What happened?

LOUISE STORY: Well, if you remember, back in September 2008, it was right after Lehman Brothers failed. The economy was on the brink. There was major panic.

And AIG, one of the things they did that really, really is the reason they failed is, they wrote all these insurance contracts to banks. So banks like Goldman Sachs, and Deutsche Bank, and Merrill Lynch, they had gotten AIG to insure them against losses on their mortgage bonds.

And, sure enough, when the mortgage market went south, AIG was paying out all these insurance claims to the banks. They couldn’t afford it. And so the government stepped in and bailed out AIG. This was very controversial, because a lot of the money the government put into AIG went right out the back door to the banks who had contracts with AIG. And that’s part of the reason this has been one of the most controversial bailouts.

RAY SUAREZ: So, Roben, an indirect bank bailout to even more institutions than we were aware of when it was happening?

ROBEN FARZAD: Yes. They got — they got bailed out for the sins of Wall Street. I mean, you talk to old-school AIG executives, and they say that they were a patsy, or that they were crucified for everybody else’s sins, that it was a transitive backdoor bailout. And, in reality, that’s what it was.

And the thing that held the entire system hostage wasn’t just that AIG being allowed to fail would subsume the entire system, but AIG was managing pensioner funds, 401(k)s, insurance plans. Municipalities were backing bonds with AIG. I mean, it was just unthinkable, in the haze of those terrifying days of September 2008 and October, to let this thing just fall and see how the dust cleared afterwards. And that’s why I think…

RAY SUAREZ: Did the intervening two years, Roben, provide a breather for the bank to become — for AIG to become a much more stable operation, as the federal government is trying to figure out how to get out of it?

ROBEN FARZAD: Yes, but you have to — and let me wax cynical here. You have to buy the fiction of it. You’re no longer dealing with a bunch of pyrotechnical — I’m sorry — a bunch of pyromaniac people in the executive suite. It’s the government that’s your counterparty. So, AIG has enjoyed much lower borrowing costs. You find that this is kind of a transitive way of dealing with a risk-free, ultimately the most peerless creditworthy asset in the government.

And so the government has cleaned up really their liabilities. It’s protected them. And they have been able to go out and reap the rewards of the bond market coming back, of the old staid business property and casualty coming back.

But you kind of have to subscribe to that accounting. And the taxpayer has really been on the hook for all that. So let’s see how this plays out. Let’s see if Benmosche’s prophecy really, really becomes true, and the — and the taxpayer can make a true profit on this within three or four years.

RAY SUAREZ: And, Louise, quickly, before we go, Tim Geithner has referred to this shortening the timeline a great deal. How long will it take for the United States government to get out of AIG?

LOUISE STORY: Well, even Treasury officials are saying today that it won’t be until February or March next year that they kick off this plan where they will start selling the stock.

And a lot of different investors I have spoken to out there think that could take months, if not years. Again, they’re trying to sell a whole neighborhood, and it is very tricky.

RAY SUAREZ: Louise Story and Roben Farzad, thank you both.

ROBEN FARZAD: Thank you.

LOUISE STORY: Thank you.

ROBEN FARZAD: Thank you, Ray.