The AIG Effect: AIG Asset Sales Yet to Repay Much Debt; Hopes High on SPV Agreement

The strategy of American International Group Inc. remains the same, only its new chief executive officer promises to be patient -- uninfluenced by public or political pressure -- as the mammoth company looks to reimburse about $182.5 billion the U.S. government has pledged in support.

AIG reported about $44.8 billion in liabilities to the Federal Reserve Bank of New York in the second quarter. The amount was about $47.4 billion in the first quarter. Currently, the Fed has pledged $60 billion.

AIG has also drawn down about $42 billion from aid from the U.S. Treasury Troubled Asset Relief Program, represented as equity in the company's last quarterly report, not debt. AIG has about $28.7 billion of TARP funds remaining. According to the Congressional Oversight Panel, AIG has yet to repay TARP fund principal and it has stopped making dividend payments as well.

Some say AIG will never repay the government, and ultimately the taxpayer, the loans and other aid extended to them.

"AIG is such a central part of the financial system, they can keep the money as long as they want to and I don't think the government cares," said Joseph Pastore, co-chairman of the securities and financial institutions compliance and defense group at Fox Rothschild LLP. "They (AIG) were a counter-party to so many transactions. If you let let them go down, it's not just them, it's, 'Oops, we lost an economy.'"

Not only is AIG unlikely to pay back the government but Ernest Badway, co-chairman of the same group as Pastore at Fox Rothschild, said AIG "may need more money to continue."

Ed Grebeck, a global debt markets strategist who has taught "Credit Default Swaps 101" at New York University for three years, said the government "is not going to get that return on equity" because right now it is "throwing good money after bad."

"It's doubtful that AIG will be able to repay TARP and Fed loans," Grebeck said. "Simply the return on equity in the property and casualty insurance business is about 6% historically -- far below that of the financial services industry of 12% to 15%. The math just doesn't work out. AIG has had a lot of losses and I think they'll have more."

AIG spokeswoman Christina Pretto said the company will "continue to look to repay the government. The goal is to sell assets and use the proceeds to repay."

Currently, much of what AIG has done -- essentially selling assets and entering an agreement with the Fed to create separate special purpose vehicles to hold the equity of subsidiaries American Life Insurance Co. and American International Assurance Co. Ltd. -- has yet to show results.

The biggest asset sale AIG has had thus far was the sale of its 21st Century Insurance Cos. as well as its direct and independent agent personal automobile business for nearly $2 billion to Farmers, a subsidiary of Zurich Financial Services Group. The impact of the sale, which closed in July, will be recorded in AIG's third-quarter report so the reduction in debt has yet to be seen.

The rest of AIG's asset sell-offs have yet to make a splash. About 30 sales have been made since the government's initial bailout of AIG. The amount of many sales was not disclosed and because the level of debt fluctuates, the transactions have not appeared to make much of a dent.

The SPV transactions have yet to close. They could make more of an impact on debt. AIG said it will contribute the equity of AIA and Alico into special purpose vehicles in exchange for preferred and common interests in those SPVs. AIG said this will enable the Fed or a trust for the benefit of the Fed to receive preferred interests in repayment of a portion of its facility with AIG. The amount of the preferred interests will be a percentage of the fair market value of AIA and Alico based on valuations acceptable to the Fed (BestWire, March 2, 2009). There is no current agreement with the Fed about taking an equity stake in AIG's Chartis SPV (BestWire, July 27, 2009).

Pretto said the final result of the agreement will be a $25 billion reduction in what AIG owes the Fed, which in turn will lower its commitment to the company to $35 billion. The Fed line has a five-year term, she said.

All told, the total direct government support to AIG stands at about $87.6 billion, with about $48.7 billion remaining in direct support. The Fed also lent about $43.8 billion for the SPVs, according to the company's quarterly report.

New CEO Robert Benmosche has laid out a rebuilding plan that is "focused on the businesses operating at full capacity to recover earnings power," said Pretto. Benmosche, Pretto said, is intent on maximizing the value of assets before they are sold -- an approach AIG has been said not to have taken since its bailout.

"It is in everybody's interest to maximize valuations," Pretto said, before offering initial public offerings in Alico and AIA. Benmosche is more willing to wait for the right time so the companies "sell for what they are fully worth," she added.