POSTED: 01:30 a.m. HST, Oct 01, 2010
NEW YORK » American International Group has a plan to exit the biggest of the Wall Street bailouts, but much as embattled lawmakers might wish otherwise, the book on TARP won't close soon.
There's no guarantee taxpayers who gave AIG a $182 billion bailout will be made whole under the plan the company announced yesterday. Under the deal, Treasury will swap its majority stake in AIG for common stock, then sell those shares over time.
The government loses its authority to tap Troubled Asset Relief Program funds on Sunday. Democrats facing tough re-elections hope voters will see the bailouts as nearing an end.
That will be a tough case to make. Close to $190 billion in TARP money has not been paid back. The Congressional Budget Office's most recent estimate said taxpayers will never get back about $66 billion of it, although estimates of the final cost have been dropping steadily.
THE PUBLIC remains angry about the bailouts, which were launched in the Bush administration's final months.
"This is the best federal program of any real size to be despised by the public like this," said Douglas J. Elliott, a former investment banker now associated with the Brookings Institution, a Washington think tank.
"It was probably the only effective method available to us to keep from having a financial meltdown much worse than we actually had. Had that happened, unemployment would be substantially higher than it is now, the deficit would have gone up even more than it has," Elliott added. "But it really cuts against the grain for a public that is so angry at banks to think that something that so plainly helped the banks could also be good for the public."
The anger might dissipate as the economy improves, but it will linger until most sitting lawmakers are out of office, said Norman Ornstein, resident scholar at the conservative American Enterprise Institute.
"Finding a way to reduce the anger -- much of it misplaced -- over what TARP did is a pretty strong political goal" for the Democrats, he said. It will be an uphill battle, Ornstein said.
TARP has been targeted by tea party groups as a giveaway that rescued Wall Street while ordinary Americans suffered. Democratic and Republican lawmakers who voted for the bailout have had to defend their votes.
The deal will give Treasury a 92.1 percent stake in AIG before it begins selling its shares. But it can't be completed until AIG displays its ability to raise money from private investors and regain a top rating from credit agencies.
Otherwise, "this deal won't go through," CEO Robert Benmosche said in an interview yesterday.
Before the stock swap, AIG will repay about $20 billion in loans it received from the Federal Reserve Bank of New York. AIG plans to repay that in part through earnings it generates and the sale of some its subsidiaries. AIG has been selling some of its units since it received the initial bailout in 2008.
CEO Benmosche said he would have preferred to put off an exit agreement until November, after the completion of some sales. But he said he wanted to make sure that as TARP expired, AIG wasn't again thrust into the spotlight as a "ward of the state."
Treasury Secretary Timothy Geithner praised the plan, saying it "puts taxpayers in a considerably stronger position to recoup our investment in the company."
The government will receive about 1.66 billion shares of AIG common stock in exchange for its $49.1 billion investment. The shares would be worth about $29.67 apiece. In trading yesterday, shares rose $1.65, or 4.4 percent, to $39.10. So if the government sells shares at current price, it would make $15.8 billion in profit.
Part of the government AIG's $182 billion bailout went unused. The rest is expected to be recovered from the sale of assets.
Treasury's work on the bailouts is hardly finished. As of Aug. 31, Treasury had tapped $460 billion from TARP for banks, auto makers and mortgage companies. Of that, $386 billion was disbursed, and $187 billion had not been repaid. AIG and automakers GM and Chrysler held the bulk of that money.
The government is in the process of selling back shares of Citigroup Inc., which received $45 billion in taxpayer support in one of the largest bank rescues by the government. The government said yesterday it raised $2.25 billion from the sale of trust-preferred shares and has raised $16.4 billion so far from the sale of Citigroup common stock. The bank repaid another $20 billion last December.