U.S. Said To Weigh AIG Exit Through Stock Disposals (Update1)

By Hugh Son
Bloomberg News
April 22, 2010

April 22 (Bloomberg) -- The U.S. government, majority owner of American International Group Inc. (AIG) after rescuing the insurer in 2008, is considering a two-year plan to dispose its stake, said a person with knowledge of the discussions.

The proposal involves converting preferred stock into common shares for sale on the open market, said the person, who declined to be identified because talks with AIG are private. If the New York-based firm consents to the strategy and there is sufficient investor demand, the Treasury Department plan could be announced as early as the fourth quarter, the person said. Treasury has invested about $47 billion in the insurer.

"You don't want to dump shares all at once into the market, you want to do it in an orderly way so the market can digest them," said Charles Calomiris, a finance professor at Columbia Business School in New York. "It's looking like taxpayers are going to get more of their money back," he said.

Treasury Secretary Timothy F. Geithner has said he doesn't want the U.S. to own private firms for "a day longer than necessary." AIG, rescued during the depths of the financial crisis to prevent an economic collapse, secured deals this year to divest two divisions for about $51 billion. That will allow AIG to pay down a Federal Reserve loan and turn to repaying Treasury, Chief Executive Officer Robert Benmosche has said.

Shares Gain

The timetable of one year to two years for disposals reflects the fact that the U.S. owns almost 80 percent of AIG from the September 2008 bailout, in addition to preferred shares obtained in subsequent rescues. Treasury will probably convert and sell preferred shares in increments to remain below that threshold, the person said. A holding of more than 80 percent could force the insurer to change accounting and require the government to put AIG on its balance sheet.

AIG rose $2.35, or 5.8 percent, to $43.25 in New York Stock Exchange composite trading at 4 p.m., the highest since Oct 15. Meg Reilly, a spokeswoman for Treasury, and Mark Herr of AIG declined to comment.

The plan may depend on completion of the division sales and was designed so that AIG can maintain an A credit grade, the person said. Ratings firms typically assign a higher value to common equity over preferred shares, which have characteristics similar to debt. Absent government support, AIG's ratings would be five levels lower, Standard & Poor's said on April 1.

Downgrades could force the insurer to post more collateral to trading partners or discourage commercial or individual clients from buying policies.

Preferred Shares

If U.S. sales of AIG shares succeed, the firm may issue preferred shares to private investors to raise funds to redeem Treasury holdings, the person said. Treasury named two directors this year to AIG's board because the company skipped dividend payments on preferred shares for four quarters.

Periodically divesting holdings is considered the primary option unless competitors emerge with large enough bids for remaining AIG units to retire the company's obligations, a scenario that is considered unlikely, the person said.

AIG has surged 44 percent in New York trading this year, as the company's holdings rebounded and investors bet that there will be value remaining for common shareholders after taxpayers are repaid. The company declined 4.5 percent last year and 97 percent in 2008, the year it posted almost $100 billion in net losses tied to soured housing bets.

Benmosche, 65, said in an April 1 interview that Treasury's planned sale of a 27 percent stake in Citigroup Inc. is a possible model for AIG's path to independence. The divestitures of AIG's largest non-U.S. life insurance divisions, AIA Group Ltd. and American Life Insurance Co., should be completed by year-end, he said.

Citigroup Plan

After the transactions are finished, "we've got to begin to look at what are the alternatives we have to raise sufficient money so that we can pay back" Treasury, Benmosche said.

The U.S. will sell its 7.7 billion common shares of Citigroup this year using a set trading program, Treasury said March 29. The New York-based bank's shares have surged about 13 percent since the announcement, compared with the 3.6 percent rise of the S&P 500 Index.

Citigroup got $45 billion from the Troubled Asset Relief Program. In September, Treasury converted $25 billion of its holding into common shares at $3.25 each. Citigroup repaid the remaining $20 billion in December and has a market value of about $140 billion based on today's closing price of $4.87. AIG's market value is about $30 billion including the U.S. stake.

Rescue Package

AIG's rescue package is valued at $182.3 billion, which includes a $60 billion Fed credit line, as much as $69.8 billion in Treasury assistance and $52.5 billion to buy mortgage-linked assets that were owned or backed by the company.

"The question is, how much value is really there," said William Poole, a former president of the Federal Reserve Bank of St. Louis. Treasury's plan for AIG is "encouraging, because they need to get out from under the government," he said.

Taxpayers stand to lose about $30 billion from the bailout of AIG, the Government Accountability Office said in December. The insurer may report first-quarter results next month.

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