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AIG Bailout That Angered Bernanke to End With U.S. Sale

By Zachary Tracer
December 10, 2012 10:21 PM EST 18 Comments
U.S. to Exit AIG Stake With Offering of 234 Million Shares
U.S. to Exit AIG Stake With Offering of 234 Million Shares

American International Group Inc. (AIG)’s rescue is coming to an end more than four years after the U.S. took over the company to save the global economy in a bailout that fueled resentment against Wall Street.

The U.S. Treasury Department is selling its last 234.2 million shares of AIG in its sixth offering of the insurer’s stock, the government said in a statement yesterday. Shares priced at $32.50 apiece, according to two people familiar with the sale who asked not to be identified because the U.S. didn’t publicly disclose the price.

Taxpayers owned as much as 92 percent of AIG after saving a firm that insured 100,000 municipalities, retirement plans and companies and was a counterparty to some of the biggest banks. Federal Reserve Chairman Ben S. Bernanke has said saving AIG after it was hobbled by mortgage-related bets made him “more angry” than any other measure the government undertook to counter the deepest financial crisis since the Great Depression.

“There weren’t a lot of options, let’s face it,” Robert Willumstad, chief executive officer of New York-based AIG when the firm was rescued, said in an interview last month. “It was controversial, it was a big risk, but one would argue today that the government got its money back and a healthy profit.”

AIG has gained 44 percent this year, closing yesterday at $33.36 a share. Proceeds from the latest sale add to the government’s profit, which was $15.1 billion on the rescue as of mid-September. Bank of America Corp. (BAC), Citigroup Inc. (C), Deutsche Bank AG (DBK), Goldman Sachs Group Inc. (GS), and JPMorgan Chase & Co. (JPM) were picked to manage the offering, the Treasury said.

Asset Sales

CEO Robert Benmosche, 68, has sold non-U.S. life insurers to help repay the bailout and divested a consumer lender, while scaling back derivatives bets since becoming AIG’s leader in 2009. The insurer, once the world’s largest, is now focusing on global property-casualty coverage and life and retirement products in the U.S.

AIG had 57,000 employees and about $550 billion in assets as of Dec. 31, compared with 116,000 and more than $1 trillion at the end of 2007. Benmosche, the former CEO of MetLife Inc. who came out of retirement to run AIG, reached a deal this week to sell a majority stake in the insurer’s plane-leasing unit.

The rescue began on Sept. 16, 2008, the day after Lehman Brothers Holdings Inc. filed for bankruptcy. The Federal Reserve Bank of New York agreed to provide an $85 billion credit line, to expire within two years, in exchange for an equity stake of almost 80 percent.

The initial bailout failed to stabilize the company and was revised at least three times to give AIG more capital and additional time to repay. In March 2009, the insurer reported a record loss of more than $60 billion as mortgage-backed securities slumped. The same day, the Treasury boosted its support, pushing the rescue to $182.3 billion.

Obama Outraged

Bernanke wasn’t the only leader to fault AIG. Dana Perino, a spokeswoman for President George W. Bush’s White House, called “despicable” expenses from a conference sponsored by AIG for independent agents at a California resort after receiving U.S. aid. President Barack Obama said bonus payments to traders at the money-losing Financial Products unit were an “outrage.”

Then-CEO Edward Liddy told Congress in 2009 of threats, including one that said AIG executives should be “executed with piano wire around their necks.” AIG stripped its logo from employee badges and charge cards after staff were harassed.

“It really stuck in the public’s craw that trillions of dollars of financial support were being provided to the commanding heights of the American financial system, and those guys were still paying themselves huge bonuses,” said Jim Millstein, the former Treasury chief restructuring officer and now CEO of advisory firm Millstein & Co. “I have real sympathy with the public in this regard.”

Leaner, Hungry

Benmosche restored the AIG name this year to units, introduced a new logo and agreed to sponsor New Zealand rugby teams including the All Blacks. He said after reaching the plane-unit deal that AIG is now “leaner, more focused and hungry for tomorrow.”

Republican Roy Blunt, now a Missouri senator, said aid was a “backdoor bailout” of banks, as AIG turned over more than $90 billion since its rescue to counterparties on housing bets such as Deutsche Bank and Goldman Sachs. Democrat Elizabeth Warren, elected this year as a Massachusetts senator, said AIG benefited from a “stealth bailout” that allowed the company to minimize its taxes based on losses accumulated in prior years.

In all, as much as $12.8 trillion was spent, lent or committed to bolster financial firms and automakers. Lenders including Goldman Sachs and JPMorgan took rescue funds that were repaid with interest in 2009. Hartford Financial Services Group Inc. and Lincoln National Corp., the other U.S. insurers to get bailout funds, repaid the government in 2010.

‘Without Cost’

“The government set out to prevent the collapse of the financial system,” Millstein said. “They did it over two administrations extraordinarily effectively and without cost to taxpayers.” The U.S. still owns stakes in firms including Ally Financial Inc. and General Motors Co. (GM)

The bailouts helped push Congress to pass the Dodd-Frank law to limit taxpayers’ cost on failing firms. AIG in October became the first non-bank to say it’s under consideration by regulators to be labeled a potential risk to the financial system, a designation that could lead to tighter capital rules.

“AIG exploited a huge gap in the regulatory system” and its Financial Products unit operated without oversight as it made derivative bets on subprime loans, Bernanke told lawmakers in 2009. “This was a hedge fund basically that was attached to a large and stable insurance company.”

‘Fed Ready’

Benmosche has said he is preparing to be “Fed ready” at AIG and is targeting 2013 for reinstating a dividend if the regulator approves. AIG has posted four straight quarterly profits.

AIG has climbed 47 percent since Aug. 7, 2009, the last trading day before Benmosche took over. That compares with a total return of 51 percent for the Standard & Poor’s 500 Index and 33 percent for the S&P 500 Insurance Index.

Chubb Corp. CEO John Finnegan, who kept his insurer profitable through the credit crisis after shunning subprime mortgage bets, has said bailouts distorted insurance markets.

“Opportunities for financially strong companies to absorb the business of weakened competitors were initially compelling,” he said in a 2010 letter. “This is as it should be in a free market unimpeded by federal intervention. But the willingness of the federal government to prop up weakened competitors by artificially injecting capital is troubling.”

Only Option

Rescuing AIG “was something the government should never have had to do,” Treasury Secretary Timothy F. Geithner said in a Sept. 10 statement “We had no better option at the time to protect the American economy.”

Before the latest sale, the U.S. had sold $44 billion of AIG shares in five offerings as the insurer bought back $13 billion. AIG will not buy shares in the latest offering, said Jim Ankner, a spokesman for the company. The New York Fed in August finished selling securities that it acquired in AIG’s rescue.

U.S. officials should thank AIG for returning to profitability and paying back the government, Benmosche said, according to New York Magazine.

“We have done all the right things,” Benmosche said, according to an article published in October. “Somebody should say, ‘By golly, those AIG people made a promise and they are living up to a promise!’ We’re left with a major part of the economy in America; they’re going to make a profit on top of everything else they’ve got.”

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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