AIG Received Added Subsidy in TARP Spending, Panel Says

WASHINGTON, Feb 09, 2009 (A. M. Best via COMTEX) -- AIG | Quote | Chart | News | PowerRating -- The federal government received American International Group Inc. assets valued at only $14.8 billion when it paid $40 billion as part of the $150 billion rescue plan for the insurer, a congressional oversight panel said.

The difference in value represented an added $25.2 billion subsidy -- 63% of the total Troubled Asset Relief Program amount used for AIG (NYSE: AIG), according to a report by the Congressional Oversight Panel for the Troubled Asset Relief Program.

AIG's $150 billion federal rescue package, as revamped and expanded in November, included $40 billion from the TARP's Systemically Significant Failing Institutions Program, which purchased perpetual preferred shares in the company and warrants equal to 2% of issued and outstanding shares. The Federal Reserve Bank of New York, which provided the remaining $110 billion loan and liquidity package, holds warrants for nearly 80% of the company's equity (BestWire, Jan. 8. 2009).

The panel was created by Congress to oversee the $700 billion TARP program, $350 billion of which has been spent.

The panel found that for the programs fashioned for the only two companies receiving individually designed rescue plans ? AIG and Citigroup Inc. ? the Treasury Department used the same models it used in a broader program designed to promote lending by healthy banks.

This resulted in significantly higher subsidies for the two companies, the panel said in its report.

It said that ?valuation of the transactions is critical because then-Treasury Secretary Henry Paulson assured the public that the investments of TARP money were sound, given in return for full value.?

Although the advisory panel and its consultants ?looked only at the discount-to-face-value that the Treasury took as a result of its TARP investment,? the report said that in the case of AIG ?they recognize that investment was part of a broader strategy by the government to prop up the company.?

The proceeds of the TARP investment in AIG were used to repay part of a loan made in the original, $85 billion rescue plan announced last September to keep AIG from bankruptcy.

The panel studied the 10 largest TARP investments to date, including those involving AIG and Citigroup.

It found that for the other eight, made under the healthy bank program -- the Capital Purchase Program created in October 2008 -- the government subsidies averaged 22%. The subsidy for Citigroup was 50%, and for AIG, 63%.

The advisory panel said that a total of 317 financial institutions have received a total of $194 billion under the CPP as of Jan. 23, 2009; the top eight represent $124 billion, or 64% of the total.

Efforts to obtain comment from members of the oversight panel and from the Treasury Department were not immediately successful.

The $150 billion rescue plan has helped AIG stabilize its finances and cancel more than $60 billion of the credit default swaps written on mortgage-backed securities, which sparked the cash-flow crisis that brought the giant insurer to the brink of bankruptcy. The company is reorganizing and trying to sell operating companies to repay the federal aid (BestWire, Dec. 24, 2008).

Most AIG insurance companies currently have a Best?s Financial Strength Rating of A (Excellent) with a negative outlook.

Shares of AIG were $1.05 in afternoon trading on Feb. 9, up 0.96% from the previous close.

(By Alyn Ackermann, senior associate editor, BestWeek: Alyn.Ackermann@ambest.com)

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