Treasury Sells More AIG Shares: $20.7B Total Cuts Stake To 15.9%

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About the column: In our column “Bull’s Eye“, we take up articles from business dailies like Economic times and Business Standard, and explain them. In each article, we cover an economic/financial concept and a market occurring that the article is focused around; and explain it in the context of that news update.To read more from the column, click here.

By Naman Sanghvi & Sangeet Agarwal

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Treasury Sells More AIG Shares: $20.7B Total Cuts Stake To 15.9%

Good news for AIG: Uncle Sam is now a minority shareholder.

The U.S. Treasury Department sold 553.8 million shares of the insurer’s common stock at $32.50 Monday, raising a shade under $18 billion and cutting its stake in the company to 21.5%, from 53.4%. The underwriting group — led by Citigroup, Deutsche Bank, Goldman Sachs and JPMorgan Chase — exercised an option to purchase another 83.1 million shares in full, buying an additional $2.7 billion in shares.

All told, the Treasury raised $20.7 billion with the Monday and Tuesday stock sale, cutting its stake in the insurer to 15.9%.

Treasury Secretary Timothy Geithner said that keeping AIG afloat “was something the government should never have had to do, but we had no better option at the time to protect the American economy from the damage that would have been caused by the company’s collapse.”

AIG, which bought $5 billion worth of stock in the offering, which priced above the $30.50 level of August and May offerings, stressed that the government rescues of the insurer have now been repaid at a profit and left the company in position for a successful future. “We are close to achieving what most outside AIG thought unimaginable,” said Chief Executive Robert Benmosche.

While there is plenty left to criticize regarding the bailouts of 2008 — in AIG’s case alone banks were made whole on contracts with the insurer while shareholders paid the price, and many executives still took home lucrative retention payments — those criticisms have certainly been blunted over the last four years.

With just four days until the anniversary of Lehman Brothers’ failure, the biggest financial institutions to take government money have in large part repaid those bailout loans and are on sounder, if not crisis-proof, footing today. The government is still well in the hole on its automotive rescue of General Motors and Chrysler, and it may never fully recoup the billion upon billions spent to keep Fannie Mae and Freddie Mac in business.

The success of the bailouts from an execution and profitability standpoint will be debated endlessly, but from the standpoint of keeping the financial system intact it is difficult to argue with Geithner: the bailouts should never have been necessary, but when they became essential they had the desired effect.

The Treasury Department has a blog post here explaining its view that the $182 billion AIG rescue has been repaid in full, and at a profit, including an infographic touting the return.

Shares of AIG were still in the red Tuesday afternoon, but hanging in above the Treasury’s sale price, down just 0.8% at $33.04.

Explanation

AIG was the 29th-largest public company in the world and one of the biggest insurers in the world. In 2008, during the economic crisis; The U.S. government seized control of American International Group (AIG) Inc; out of fears of the ramifications of the failure of one of the world’s biggest insurers would have on the market which had still not seen the bottom on its way down. While the government let Lehman Brother go bankrupt, AIG was just too big to ‘let it fail’. The government will lend up to $85 billion to AIG get a 79.9% equity stake. Before deciding to step in the government tried raising money through private parties, but when that failed decided to step in; as allowing AIG to file for bankruptcy protection like Lehman Brothers would have been catastrophic. The company was bailed out by the Federal Reserve Bank of New York, but even after a loan of $85 billion, put in additional money on account of continued losses. The total amount spent in bailing AIG out was $182 billion, making it the biggest federal bailout in United States history.

As of April 2011, the US treasury held as much as 92 % in AIG. Earlier this week the US government sold USD 20.7 Billion worth shares reducing its stake to 15.9%. The government ( Treasury and FED) recovered about $197.4 billion from their rescue of A.I.G, thus making a substantial profit with the taxpayer’s money. The Treasury still has 234.2 million common stock shares which will provide an additional return for taxpayers (shares were sold above USD 30/ share)

As per Yahoo finance, volumes of shares of AIG available for trading currently stands 1730 million. (calculated using market cap – 61. 19 b divided by share price – $34.9). Before this week’s offering the AIG ownership stood at close to 53% which means the treasury had close to 916 million shares. Out of 916 million shares treasury on Monday sold 553. 8 million shares, the sale also included an option which allowed underwriters to buy additional 83.1 million shares, for which the buyers were Citigroup, Deutsche Bank, Goldman Sachs and JP Morgan Chase. The Treasury still has 234.2 million common stock shares which will provide an additional return for taxpayers (shares were sold above USD 30)

Underwriting group –

An intermediary between the issuance Company and investors are referred to as underwriters. When the company releases its IPO or sell shares, it first chooses an investment bank to buy its majority of shares in the primary market. With the help of these investment firms the shares are then floated in the secondary market (stock exchange like Sensex, NYSE) where the common investor like you and me do trading of shares.

The underwriters makes money by charging underwriting fees to the issuance company and selling shares to the investors. When the economy faces a downturn, these holdings can take a bite on underwriters, as they now have to sell the shares below the specified offering because of fewer buyers/investors in the market.

Here in this case treasury is the issuance company which on Tuesday sold 83.8 million shares to underwriters like JP Morgan, Citi Bank, Goldman Sachs.

When faced with the decision of rescuing AIG, critics claimed that Wall Street companies like AIG had created, marketed, and sold risky mortgages and sealed their own doom; and the common man’s money should not be used to bail out and give another chance to such companies. Having not only saved AIG, but also made a profit with the taxpayer’s money, this will prove to be a great victory for the Obama administration and his treasury officials.

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1 comment

  1. Anuva Kulkarni

    I really liked how you explained everything so that anyone could understand it. I’d suggest a movie that’s about the bailouts, it’s called “Too Big To Fail” .

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