Published:
Tuesday, 11 Sep 2012 | 1:33 AM ET
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(Reuters)
- The U.S. government cut its stake in American International Group Inc
to about 21.5 percent on Monday, making a profit of $12.4 billion on
the insurer's crisis-era bailout and bringing the unpopular rescue
closer to its end.
The
Treasury Department sold $18 billion worth of the insurer's shares at
$32.50 apiece, in what could yet be the largest ever secondary offering
in U.S. history. The underwriters have the option to buy another $2.7
billion worth of AIG shares, which they can exercise in the next 30
days.
The offering
represents the government's biggest sell-down of AIG shares since it
rescued the insurer with bailouts in 2008 and 2009. At one time, the
government pledged as much as $182.3 billion to prop up the company, as
mounting subprime losses forced the insurer to come up with a lot of
cash quickly. In exchange, the government received a nearly 80 percent
equity stake in the company.
The
Treasury's sale comes as President Barack Obama campaigns for a second
term and has been forced to defend his support of decisions to use
taxpayer money to prop up companies during the crisis.
A
White House spokesman said on Monday that the AIG stock sale represents
a "commitment to recover taxpayer money" and that President Obama is
pleased with progress in winding down the government's stake.
The
administration has been unwinding its position in the politically
unpopular financial crisis programs ahead of the November 6 election
amid Republican campaign pressure over the role of the government in the
private sector.
The
government has recouped $342 billion out of $411 billion disbursed to
financial institutions through the most prominent bailout, the Troubled
Asset Relief Program, or TARP. But more than 300 small banks that
received TARP funds have yet to repay taxpayers. Rescues of AIG and
other large banks also included other bailout programs.
"From
the government's point of view, it's political," former AIG Chief
Executive Hank Greenberg said in an interview on CNBC, adding that the
government had hoped to exit its bailout investments much sooner.
The
AIG share sale, which was announced on Sunday, is the largest follow-on
stock offering since December 2009, when Bank of America Corp sold
$19.3 billion worth of stock, also to pay back taxpayers. It is also the
largest equity offering since Facebook Inc's initial public offering in
May, according to Thomson Reuters data.
PROFIT FOR U.S.
The
offering was priced at a 4 percent discount to AIG's closing price of
$33.99 on Friday, the last trading day before the Treasury announced
plans for the sale.
The
Government Accountability Office estimated in May that taxpayers could
make a profit of $15.1 billion on the bailout. If exercised, the over
allotment will get the government, which includes the Federal Reserve
and Treasury, to that figure.
AIG's stock closed 2 percent lower at $33.30 on the New York Stock Exchange on Monday.
Still,
the government is exiting the investment faster than many investors had
anticipated. The government had steadily reduced its stake down to 53
percent in smaller transactions since early 2011, and many investors
expected the latest offering to be smaller.
The stock sale, including the overallotment option, will cut the government's stake to 15.9 percent from 53 percent in one go.
AIG itself bought back $5 billion of its shares in the stock sale, with the rest going to the broader public.
AIG
planned to use $3 billion worth of cash and short-term securities, and
$2 billion in proceeds from the sale of its stake in Asian life insurer
AIA Group to buy back stock from the government, the company said in a
securities filing.
Repurchasing
shares near their recent trading price - roughly 56 percent of book
value - is likely to boost AIG's earnings through an accounting gain,
but it will also reduce a good portion of cash, Greenberg said.
The
Treasury also owns warrants to purchase another 2.7 million shares,
according to AIG's filing. The Treasury has allowed other financial
firms to repurchase bailout-related warrants directly or to auction them
off.
REGULATORY CHANGE
The
decrease in the Treasury's ownership triggers an important regulatory
change for AIG. Once the Treasury's ownership stake falls below 50
percent, the insurer starts to be regulated by the Federal Reserve as a
savings and loan holding company, since AIG owns a small bank.
As
a result, AIG will have to comply with new rules under the 2010
Dodd-Frank financial reform law, including the Volcker rule, which
limits large financial firms' ability to trade for their own account or
own stakes in private equity firms and hedge funds.
Even
if AIG were to rid itself of the savings-and-loan subsidiary, the
Financial Stability Oversight Council may still designate AIG as a
"systemically important financial institution" because of its size.
That
would subject it to other, stricter federal regulations for large
financial firms, including higher capital requirements, stress tests and
possible dividend and buyback restrictions.
"To
stabilize and then restructure the company with a very substantial
positive gain for the American taxpayer is a significant
accomplishment," Treasury Secretary Tim Geithner said in a statement.
"But
we need to continue the critical task of implementing Wall Street
reform so that the American economy is never put in this position
again."
Underwriters
for the deal include Citigroup Inc, Deutsche Bank AG, Goldman Sachs
Group Inc, JPMorgan, Bank of America Corp's Merrill Lynch division,
Barclays PLC, Morgan Stanley, Royal Bank of Canada's RBC Capital Markets
division, UBS AG, Wells Fargo & Co, Credit Suisse and Macquarie
Group Ltd.
(Reporting
By Dan Wilchins, Ben Berkowitz and Lauren Tara LaCapra; Editing by
Andrea Ricci, Tim Dobbyn, Andrew Hay, Gary Hill, Paritosh Bansal and
Ryan Woo)
(This
story was refiled to correct the size of Treasury's stake in 1st bullet,
paragraphs 1 and 14, and remove $39 per share reference in paragraph
11)
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