Tags: Fed | Profit | AIG | Rescue

Bloomberg Government: Fed’s Profit on AIG Rescue Exceeds $11 Billion

Friday, 20 April 2012 11:20 AM

The cost to taxpayers of American International Group Inc.’s 2008 government bailout is declining as the insurer accelerates payments to the Federal Reserve Bank of New York and the U.S. Treasury Department.

The Bloomberg Government Barometer shows that the district bank had profit of $11.1 billion on aid given to New York-based AIG. The Treasury must sell a majority stake to recover its full investment and would profit if the remaining holding were sold at current market prices.

Taxpayers are recovering funds from rescue programs more than three years after the government extended support to stabilize the banking system and save jobs. The Fed’s larger and earlier gains on the AIG bailout reflect the structure of the aid, said Josh Stirling, an analyst at Sanford C. Bernstein & Co.

“More of the Fed’s investments were originated as secured borrowings, but as they’ve been repaid they’ve often had clear leverage” to the increase in asset values, Stirling said in a phone interview. The Treasury ended up with a “riskier” stake by converting its preferred shares into common stock, he said.

The New York Fed earned $8.22 billion in interest and fees on a credit facility and other support extended to the insurer, according to the regulator’s website. The district bank also made $2.85 billion on its investment in a bailout fund called Maiden Lane II that held mortgage bonds taken over from AIG.

Another facility, called Maiden Lane III, had $9 billion outstanding on a loan from the New York Fed as of April 11. The regulator said this month that it may wind down the portfolio, valued at about $17.6 billion, through asset sales and invited banks including Goldman Sachs Group Inc., Barclays Plc and Deutsche Bank AG to submit bids to buy part of the holdings. AIG is entitled to some of the profits if the facility is liquidated.

The Treasury earned about $930 million in interest and other income on its preferred stake before converting it into common stock last year. Since then, the department has sold about 400 million of its shares for $29 apiece in two offerings, for a profit of more than $100 million, assuming a break-even price of $28.72 a share. AIG closed yesterday at $32.59, and the Treasury could fail to recover its investment if it sells below the breakeven price.

Matthew Anderson, a spokesman for the Treasury, referred to a presentation on the department’s website that said the government stands to make a gain on its AIG investment at current market prices. Jack Gutt, a spokesman for the New York Fed, declined to comment, as did AIG’s Mark Herr.

The insurer was rescued in September 2008 after wrong-way bets on the housing market drained capital. The bailout was revised at least four times, swelling to $182.3 billion as the U.S. extended more credit and lowered the interest charged. Asset sales helped the insurer reduce the government’s investment to about $45 billion last month.

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Friday, 20 April 2012 11:20 AM
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