Are we going to own AIG forever?

| January 30, 2012 | 2 Comments

Last week I showed you exactly how TARP’s Special Master for Compensation decided to continue paying millions in compensation to the chiefs of bailed out companies. (Short answer: Tim Geithner talked a good game about being tough on pay but then flip-flopped at the first opportunity.)

But here’s the other interesting thing about this saga: AIG’s not so sure that we’ll ever get our $51 billion back.

Kenneth Feinberg, TARP’s Special Master for Compensation, was supposed to make sure that the bailed-outs paid their execs less of the short-term awards that might encourage risky behavior — like cash — and more of the sort of stuff that might encourage them to not send their companies hurdling toward oblivion. Less IBGYBG (“I’ll be gone, you’ll be gone”, and yes, this is an actual finance term) and more “in it for the long haul”. But Feinberg and his office told TARP’s Special Inspector General that “companies were very hesitant to pay long-term restricted stock because there was no certainty that some of the companies would ever be free of TARP.”

And by “companies” he almost certainly means “AIG”. Consider:

  1.  SIGTARP, the special inspector general, found that Treasury has no “concrete exit plans”, not for AIG nor for GM or the entity formerly known as GMAC (now Ally Financial).
  2. Treasury still owns 1.455 billion in AIG stock. To get some perspective note that Wal-mart, #1 of the Fortune 500 has 1.78 billion in stock on the public market.
  3. For us to break even Treasury would need to sell each share of AIG for $28.13. But AIG’s stock is extremely volatile, making it very difficult for Treasury and its bankers to plan the several large-scale sales needed to divest the entire holding. Check out this 1-year chart of AIG’s share price from Bloomberg

    Source: Bloomberg

So what’s Treasury to do? Sell at a loss and face the fury of millions of taxpayers? Or, seeing as many may have forgotten that we even own the darned thing, sit quietly on it and pray like heck that the price shoots up and the markets calm down. And just when might that happen? I think we are in this one for the longest of hauls.

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Category: TARP

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  • http://alephblog.com David_Merkel

    I think the US has two possible ways out with $AIG. Take control, break it up, and auction off the pieces. Or, put the companies into runoff. If the reserves are accurate, you’ll get book value back. As cash flow comes in, buy up shares on the open market that are currently trading well below book, or dividend out the money to all shareholders.

    But if you try to sell off AIG shares, that’s a losing battle, because the US holdings are so big that they depress the value of what they would get in a sale. Purchasers won’t pay up, because they know the US is a forced seller, and has a lot further to go.

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