AIG Closes in on TARP

The Congressional Budget Office confirmed yesterday that when all is said and done, federal monies provided to American International Group Inc. (AIG) under the Troubled Asset Relief Program (TARP) will cost the U.S. Treasury about $14 billion.

The CBO noted that total cost of the program, which provided assistance to several other financial institutions, the auto market and other programs, will be about $25 billion over the life of TARP. This amount is “substantially less” than the $109 billion estimated in March (in its March report, CBO estimated that TARP assistance to AIG would cost about $36 billion over the life of the program).

TARP helped AIG in two ways, noted the CBO: a purchase of $40 billion in AIG preferred stock and the creation of a $30 billion line of credit for the company in September 2008. The report also notes that in September, AIG and the Treasury reached an agreement to restructure AIG's obligations under TARP, specifically the Treasury was called to exchange its preferred stock for more than 1 billion shares of AIG common stock, with AIG agreeing to draw down the remaining $22.5 billion from the line of credit to buy preferred shares in former AIG subsidiaries from the Federal Reserve Bank of New York.

The $14 billion figure is based on the current market price for AIG common stock, as well as considering the possibility that the AIG-Treasury transaction would not be completed as announced, noted the CBO.

These activities are part of a larger strategy to get AIG back on track, and the company already has raised billions of dollars by divesting noncore operations, such as American International Assurance and the American Life Insurance Co.

Meanwhile on Tuesday, AIG disclosed in a regulatory filing that it would issue new bonds for the first time since it was rescued. The preliminary prospectus did not list specific details like the size of the offering, but further reports say the insurer sold $2 billion in bonds. 

AIG’s CEO, Robert Benmosche, has long stressed the need for the company to hold a bond offering as a sign that the insurer is no longer a ward of the state, reports Bloomberg.

“The markets have increased confidence in AIG's ability to service debt on an ongoing basis, and, by extension, in its feasibility as a sustainable enterprise,” Clark Troy, a senior analyst based in Chapel Hill, N.C., for Aite Group, a research firm, told Bloomberg.