Reporting from Washington — American International Group Inc. said it has reached agreement in principle with U.S. government officials to repay about $100 billion in taxpayer money it still owes, a process that could end one of the largest and most controversial bailouts of the financial crisis.
A key part of the plan, which has been the subject of weeks of negotiations, would have the Treasury Department convert into common stock about $49.1 billion in preferred shares purchased with money from the Troubled Asset Relief Program.
The move would increase the U.S. ownership stake in the New York insurance giant to 92% from 80% but allow the government to sell the shares over time in the open market to end the taxpayer support.
The exit strategy "dramatically accelerates the timeline for AIG's repayment and puts taxpayers in a considerably stronger position to recoup our investment in the company," Treasury Secretary Timothy F. Geithner said.
"While there is a lot of work ahead to execute the terms of this agreement, today we are much closer to seeing a clear path out," Geithner said.
AIG received commitments of federal aid totaling $182 billion in a complex, multistep bailout engineered by the Treasury and the Federal Reserve. The company never received all the funds, and it now owes the government about $95 billion. The TARP portion of that includes $1.6 billion in dividends owed.
Separately, the Fed provided about $43 billion in indirect assistance by creating entities to buy securities and other assets from the company to provide it with cash. The Fed is still owed about $28 billion in loans it made to those entities, and has said those loans should be repaid as the assets are sold. AIG does not owe that money.
AIG executives had insisted throughout the year that taxpayers would be repaid in full, and Federal Reserve Chairman Ben S. Bernanke told Congress in June that he believed AIG would repay all it owes.
On Wednesday, AIG Chairman Steve Miller said at an analysts' conference that the U.S. government could end up making a "significant profit" on the bailout.
But the government's watchdog panel for TARP said in a June report that taxpayers "remain at risk for severe losses" from the AIG rescue. The Congressional Budget Office's latest estimate, in March, was for a $36-billion loss.
Chief Executive Robert H. Benmosche reiterated his vow that AIG would pay back its government aid. "This is a pivotal milestone as we deliver on our long-standing promise to repay taxpayers, and we thank the American people for their support," Benmosche said.
The agreement, he said, "vastly simplifies" the complex bailout that began in September 2008.
Benmosche said AIG now has "a clear path" to repay about $20 billion it owes the Federal Reserve Bank of New York and "sets in motion the steps for the U.S. Treasury to exit its ownership of AIG over time."
AIG said it expects to repay the Fed and complete the issuance of stock to the Treasury by April. But whether taxpayers get back all the money they've pumped into AIG will depend on how well its stock price does over time.
In September 2008, as investment bank Lehman Bros. collapsed, the Federal Reserve swooped in to rescue the teetering AIG out of fear that its failure could trigger financial chaos worldwide.
AIG, once the world's largest insurance company, had sold coverage through complex securities called credit default swaps based on mortgage-backed securities to a slew of financial institutions.
In the following months, the Fed and the Treasury committed $182 billion to the bailout, taking an 80% ownership stake in the company and beginning a process in which AIG sold off key parts of its business to repay the money.
But the growing size of the bailout angered lawmakers. And AIG further inflamed tensions last year when it announced it was paying $165 million in bonuses to employees of its Financial Products division, which sold the credit default swaps that nearly bankrupted the company.
Today, AIG has stabilized as it restructures and sells assets to help pay off its government debts. On Thursday, for example, it said it agreed to sell its two Japanese life insurance subsidiaries to Prudential Financial Inc. for $4.8 billion.
Restructuring costs led to a $2.7-billion loss in the second quarter, after a $1.5-billion profit in the first quarter. Those results represent dramatic improvement from the $61.7 billion loss in the last three months of 2008.
AIG remains a massive company with revenue of $36.3 billion in the first half of the year and assets totaling $850.5 billion at the end of June, 15% lower than its pre-disaster asset level.
Shares of AIG jumped $1.65, or 4.4%, on Thursday to $39.10. At that price, the company's stock was valued at about $27.3 billion.