AIG, the poster child that epitomized everything bad about the nation’s financial bailouts, announced a plan Thursday to repay the government — possibly with profits.
It marked a final chapter in the sordid bailout tale, which — though it proved mostly a success at reviving failing financial goliaths, ultimately at little cost to taxpayers — continues to generate public anger toward legislators who provided the funds.
Two years after it received the largest government bailout in history, worth more than $180 billion, American International Group Inc. said it would sell company assets to repay loans from the Federal Reserve and provide the Treasury with 1.6 billion shares of common stock, enabling the government eventually to recoup the rest of its money through stock sales.
If the company’s stock stays near Thursday’s price of almost $40 a share, that would yield a $16 billion profit for the Treasury, adding to profits the government already has earned on its bailouts of JP Morgan, Goldman Sachs and other big banks.
House Speaker Nancy Pelosi, California Democrat, issued a press release declaring a victory for Democrats who pushed through a $700 billion bank-bailout program against vehement opposition from many Republicans and the public at large in the wake of AIG’s catastrophic near-failure and bailout in September 2008.
AIG eventually received $70 billion in funding from the bailout fund, although most of its original bailout was provided by the Fed through massive loans that led to a federal takeover of what was then the world’s largest insurance company.
While Democrats have taken a pummeling in public opinion over the bank bailouts, which began under President George W. Bush, many Republicans also voted for the program at Mr. Bush’s urging, and some have paid a heavy price by losing seats in primary elections this year.
AIG’s road map to once again become a private company also seems a vindication for Treasury Secretary Timothy F. Geithner, who arranged the AIG bailout as president of the New York Fed two years ago and then as Treasury chief recently negotiated terms of the payoff.
“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,” he said.
But Mr. Geithner’s job often seemed to be on the line after the unpopular and messy AIG bailout burgeoned into a major scandal and provoked a raft of hearings in Congress during which Republicans called for his resignation.
Things only got worse for him when shortly after taking the reins as Treasury secretary, AIG announced lavish bonuses for employees of the financial-products division, which was responsible for causing the massive losses that led to the bailout. The division provided a kind of credit insurance on complicated derivative securities that blew up and caused the financial collapse in the fall of 2008.
Anger over AIG’s audacity at providing generous compensation to many of the people who cost the taxpayers so much money — with the Treasury’s and Fed’s acquiescence — provoked another round of outrage, hearings and a drive in Congress to limit executive pay and perks that continues to this day.
Angry legislators across the political spectrum also cited the Fed’s involvement with AIG in a bid to defeat Fed Chairman Ben S. Bernanke’s bid for a second term early this year. While Mr. Bernanke overcame the opposition, like Mr. Geithner, he remains scarred from his battles with Congress over AIG.
AIG’s monumental bailout, which the Fed maintained was unavoidable, given the limited legal authorities it had at the time, was a principal reason that Congress rewrote the banking laws to prohibit the government from ever again bailing out such “too big to fail” financial giants.
The financial-reform law enacted this summer now extends the reach of federal regulators to insurance firms like AIG, which previously were regulated only by states, and sets up a procedure to dismantle failing firms and sell off the parts to pay for any temporary taxpayer assistance.
The harsh congressional and public reaction drove a counterreaction among big banks that received assistance, prompting most to quickly repay their bailout funds to be free from any strings attached by the government, including limits on executive pay.
But while healthier banks were able to quickly return their government aid, few analysts thought until recently that AIG would ever be able to repay in full, as it was so deeply in debt to the government and so hobbled by the financial collapse it helped to cause.
That AIG is now able to do so is a testament to the return of good health to globally operating financial firms since the crisis, although small banks across the country continue to suffer from the real estate crisis and are failing in large numbers.
“Free at last,” said Rob Haines, an analyst with CreditSights, who said the AIG repayment plan is good news for the company as well as for the government, although AIG may struggle for a while longer as it strives to repay its obligations.
“Exiting a partnership with the federal government makes good business sense, but there are still many hurdles before the company’s restructuring is complete,” he said.
AIG has been winding down its disastrous credit derivatives business and focusing on core traditional insurance businesses, which remained solid and profitable even as the derivatives division imploded and dragged down the company.
To pay off $20 billion in remaining Fed loans, AIG is selling its foreign life insurance businesses, American Life Insurance Co., to MetLife Inc., and offering stock for the first time in its Asian life insurance business, American International Assurance Co.
AIG also is transferring other obligations from the Fed to the Treasury, and will replace $49 billion of preferred stock already owned by the Treasury with common stock, giving the Treasury 92 percent ownership of the firm.
The Treasury plans to gradually sell off the stock, as it has done with shares of Citigroup and plans to do with shares of General Motors Co. after the Detroit automaker makes its first public offering. The Treasury has recouped $41.6 billion of $45 billion in bailout funds it provided Citigroup through the stock sales.
The profits the Treasury has made from the sale of shares in big banks have helped to offset the remaining liabilities of the bank-bailout fund, which officially expires on Monday.
Small and regional banks still owe the Treasury about $65 billion in bailout cash, and have been slow to repay because of their continuing financial problems.