US expects profit on AIG bailout

SAN FRANCISCO — The U.S. government said Monday that it expects to make a profit on its massive bailout of American International Group Inc., assuming the insurer’s restructuring plans are completed.

The initial public offering of AIG’s Asian insurance business AIA Group raised $20.5 billion in cash, while the sale of Alico, another Asian unit, to MetLife Inc. raised about $16.2 billion, of which $7.2 billion is cash, the Treasury Department said in a statement.

This $36.7 billion will be used to repay a loan that AIG got from the Federal Reserve Bank of New York and pay off a lot of the New York Fed’s preferred interests in certain AIG subsidiaries.

The U.S. government committed more than $100 billion to save AIG from bankruptcy in 2008. Since then, the insurer has been trying to sell assets to raise the money needed to repay taxpayers.

In recent months, AIG’s efforts have gained momentum. At the end of September, the company unveiled what it hopes is a final plan to extricate itself from the government’s grasp.

The AIA initial public offering and the Alico sale were the most important parts of the plan because they had the potential to inject a lot of cash in the process. The AIA debuted on the Hong Kong stock market last week, and MetLife’s purchase of Alico closed Monday.

“We promised the American taxpayers we would repay them, and the initial public offering of AIA last week and the completion of the Alico transaction move us closer to delivering on our promise,” AIG Chief Executive Robert Benmosche said in a statement Monday.

“These transactions will generate sufficient cash to allow AIG to pay off the (New York Fed’s) credit facility, marking a major milestone in our commitment to repay the American taxpayers,” he added.

AIG still owns a big chunk of AIA, and it got a lot of MetLife stock in the Alico deal. These assets are held by special-purpose vehicles controlled by the New York Fed.

AIG will draw up to $22 billion from the Treasury Department’s Troubled Asset Relief Program, or TARP, and use that money to buy the New York Fed’s stakes in these special-purpose vehicles.

The Treasury said Monday that the value of assets in the special-purpose vehicles “significantly” exceeds the New York Fed’s stake. That means no losses are expected when the Treasury takes over the vehicles.

Treasury also has another $47.5 billion of cash invested in AIG. If AIG’s exit plan is completed in early 2011, Treasury will end up with 92.1 percent of AIG’s common stock.

Based on Friday’s closing price, that stake is worth roughly $69.5 billion, which “significantly exceeds” Treasury’s $47.5 billion cash investment in AIG, the government said.

The New York Fed also lent more than $30 billion to other special-purpose vehicles that hold mortgage-related securities and other assets that AIG either guaranteed or invested in before the financial crisis. The vehicles are called Maiden Lane II and Maiden Lane III, and AIG currently owes $13.5 billion and $14.3 billion, respectively, on these.

The fair value of the assets supporting Maiden Lane II is $16.5 billion, so the New York Fed expects its loan to this vehicle will be repaid in full. The fair value of the assets supporting Maiden Lane III is $23.5 billion, and the New York Fed’s loan to this vehicle will also likely be repaid in full, the Treasury said.

“Based on current market prices and the value of the assets supporting the (New York Fed) loans to and preferred interests in AIG and Maiden Lane II and III, the U.S. government expects to earn a profit on its loans to and investments in AIG assuming the restructuring announced on Sept. 30 is completed,” Treasury said in a statement.

“The completion of the restructuring is subject to a number of conditions,” Treasury added. “Nevertheless, the AIA IPO and sale of Alico reflect the substantial progress that AIG and the U.S. government have made to date in restructuring the company.”

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US expects profit on AIG bailout