Reporting from Wasnhington — American International Group Inc. announced early Thursday that it had reached agreement in principle with government officials to repay the approximately $100 billion in taxpayer money it still owes, starting a process that would 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, is for the Treasury Department to convert $49.1 billion in preferred shares purchased with money from the Troubled Asset Relief Program into common stock in AIG. The move will increase the U.S. ownership stake in the insurance giant from 80% to 92%, but allow the government to sell the shares over time in the open market to end the taxpayer support.
"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," said AIG Chief Executive Robert H. Benmosche, who has been outspoken in asserting that taxpayers would not lose money from the bailout.
He said the agreement "vastly simplifies" the complex, multi-step bailout begun in September 2008, which involves the Federal Reserve and the Treasury Department. Benmosche said AIG now has "a clear path" to repay the approximately $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.
AIG Chairman Steve Miller said at an analysts' conference Wednesday that the U.S. government could end up getting a "significant profit" on the bailout. Federal Reserve Chairman Ben S. Bernanke told Congress in June that he believed AIG would repay all it owes.
But the government's watchdog panel for the $700-billion TARP program said in a report in June that "taxpayers remain at risk for severe losses" from the AIG rescue.
In June, the oversight panel reported AIG still owed the government $132.3 billion and the Congressional Budget Office estimated the bailout would result in a $36-billion loss.
The Treasury Department said Thursday it welcomed AIG's restructuring plan.
"The exit strategy announced today dramatically accelerates the timeline for AIG's repayment and puts taxpayers in a considerably stronger position to recoup our investment in the company," said Treasury Secretary Tim Geithner. "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. AIG's Board of Directors and new management team deserve credit for the substantial progress they've made to lower the company's risk profile, refocus it around core insurance businesses, and put it in a better position to pay back taxpayers."
Government officials did not have an immediate reaction to the announcement but were expected to comment later Thursday. The Obama administration has been pushing for a deal to end the AIG bailout ahead of the November congressional mid-term elections.
In the days following the collapse of investment bank Lehman Bros. in September 2008, the Federal Reserve swooped in to rescue the teetering AIG out of fears its failure could trigger financial chaos. AIG, then the world's largest insurance company, had sold insurance called credit default swaps on mortgage-backed securities to a slew of financial institutions.
In the coming months, the Fed and 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 in early 2009 when it announced it was paying $165 million in bonuses to employees of the company's Financial Products Division, which sold the credit default swaps that nearly bankrupted the company.
AIG has been selling off those assets and using the money to reduce what it owes to the federal government. On Thursday, for example, AIG announced an agreement to sell its Japan-based life insurance subsidiaries, AIG Star Life Insurance Co. and AIG Edison Life Insurance Company to Prudential Financial Inc. for $4.8 billion.