Colin Barr

Following the money in banking, economics, and Washington

Treasury's shock and awe on AIG

December 8, 2010: 4:59 PM ET

No doubt about it, Treasury can't get out of AIG fast enough.

AIG (AIG), Treasury and the Federal Reserve on Wednesday finalized the terms of the latest restructuring of the giant insurer's bailout. Under the arrangement, the outlines of which were announced in September, AIG borrows money from Treasury to repay its remaining borrowings from the Fed, leaving Treasury with 92% of the company's common stock. That deal is  expected to close in March.

"Today's announcement is a milestone in the government's long-stated efforts to exit our investments in private companies as soon as practical while protecting taxpayers," the government said.  "When all is said and done, we believe taxpayers will recover every dollar invested in AIG and stand a good chance of making a profit."

I am in control

That's a large chunk of stock, and the government – which is not exactly eager to be seen in the bailout business nowadays, what with all the associated bad press – would surely like to sell it sooner rather than later so it can advertise all the profits its so-called investments are making for taxpayers. This has worked wonders lately with two other bailed-out outfits, Citi (C) and GM (GM).

Thus, the Wall Street Journal reports the government wants to sell a quarter of its stake -- $15 billion worth -- in a series of deals that would ideally start early in 2011.

But the government doesn't want its stock sales to compete with AIG's own, which could drive down the price the government gets for its shares. The Journal says  AIG would get to sell $2 billion or $3 billion worth in the offering that would slash the government's stake so deeply.

However that math ends up working out, under Wednesday's deal AIG will cede considerable control of its capital-raising ability till the feds have slashed their holdings by more than half.

Until the Treasury Department's ownership of AIG's voting securities falls below 33 percent, the Treasury Department will have complete control over the terms, conditions and pricing of any offering in which it participates, including any primary offering by AIG. As a result, although AIG has the right to conduct two primary offerings per year, the Treasury Department may decide to participate in those offerings, and to prevent AIG from selling any equity securities.

That is to say, AIG can say it wants to sell stock to raise money, and Treasury if it wishes can say, That is a fine idea but the guys raising the money will be us.

This is not to say the restructuring is a bad deal for AIG. Among other things, it gets the right to sell as much as $7 billion in stock for itself between now and August, assuming Treasury gives it the go-ahead.

And why wouldn't it? Treasury certainly wants the company to have enough money kicking around to prosper. This, after all, is why AIG never had to pay the billions of dollars in dividends the government was due on its preferred stock loans.

And plus, boo hoo, the company is going to need the money to deal with all the changover-related red tape.

The issuance of the shares of AIG Common Stock to the Treasury Department may result in a change of control of AIG. A change of control of AIG triggers notice, approval and/or other regulatory requirements in many of the more than 130 countries and jurisdictions in which AIG and its subsidiaries operate. In light of the large number of jurisdictions in which AIG and its subsidiaries operate and the complexity of assessing and addressing the regulatory requirements in each of the relevant jurisdictions, AIG may be unable to obtain all regulatory consents or approvals that may be required in connection with the Recapitalization.

Serves 'em right for getting bailed out, though.


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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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