Thursday, September 30, 2010

AIG Pays The Government Back With Its Own Money AGAIN

Say this about AIG - the smoke and mirrors they are employing will fool the vast majority of the American people.  I sent out an article on twitter last night about the mechanics of Petrobras's recent massive share offering.  AIG's announcement today is like deja vu all over again.  It was only December of 2009 when I wrote about how AIG was doing the old Teddy KGB: "I'm paying you with your money."   

This gets complicated quickly, so let's review Fed/Treasury stakes in AIG:

1) AIG owes the Fed $20B in senior secured debt under the FRBNY credit facility
2) The Fed owns $26B in preferred shares of AIG/ALICO, held in a special purpose vehicle (aka, the Teddy KGB Transaction)
3) Treasury owns $49B in AIG preferred shares from TARP, and warrants for 80% of the common stock

Today's announcement about AIG squaring away all its debts made me scratch my head:

First, they addressed the $20B in FRBNY debt:
"AIG owes the FRBNY approximately $20 billion in senior secured debt under the FRBNY credit facility. Under the plan, AIG expects to repay this entire amount and terminate the FRBNY senior secured credit facility with resources from the parent as well as with proceeds from a variety of asset dispositions underway, including the initial public offering of its Asian life insurance business, American International Assurance Company Ltd. (AIA), and the pending sale of its foreign life insurance company American Life Insurance Company (ALICO) to MetLife, Inc."

Ok - so they're going to repay that using asset sales (ALICO is in progress, and AIA has been "announced" - they hope all of AIA is worth roughly $25B) and cash on hand.  Let's proceed:

Facilitating the Orderly Exit of the U.S. Government’s Interests in Two Special Purpose Vehicles (SPVs) That Hold AIA and ALICO: Today, the FRBNY holds preferred interests in two AIG-related SPVs totaling approximately $26 billion. Under the plan, AIG will draw down up to $22 billion of undrawn Series F funds available to the company under the Troubled Asset Relief Program (TARP) to purchase an equal amount of the FRBNY’s preferred interests in the SPVs. AIG will then immediately transfer these preferred interests to the U.S. Treasury as part of its consideration for the Series F preferred shares.

The $26B in preferred AIA/ALICO is the Teddy KGB piece I wrote last December.  AIG is going to - get this - borrow {MORE} money from the Treasury to buy the preferreds back from the Fed, and transfer the interests to the Treasury!  Voila!  Smoke and mirrors!  the Fed is paid back, and now AIG owes... wait for it.. The Treasury instead!  SOLVED ! (???)

The AIG press release continues:

"AIG also will apply proceeds from future asset monetizations, including the announced sales of the AIG Star Life Insurance Co. and AIG Edison Life Insurance, to retire the remainder of the FRBNY’s SPV preferred interests. When these transactions are completed, AIG expects that it will have repaid the FRBNY in full. To retire the U.S. Treasury’s preferred interests in the SPVs, AIG will apply the proceeds of future asset monetizations, including its remaining equity stake in AIA and the equity securities of MetLife that AIG will own after the sale of ALICO to MetLife closes."

Ahhh.  Treasury will be repaid by FUTURE asset monetizations.    And what's this about the Metlife Shares?  Let's check the footnotes:

"On March 8, 2010, AIG announced a definitive agreement for the sale of ALICO, one of the world’s largest and most diversified international life insurance companies, to MetLife, Inc. for approximately $15.5 billion, including $6.8 billion in cash and the remainder in equity securities of MetLife, subject to closing adjustments. This transaction is expected to close in the fourth quarter of 2010."

Notice anything important?  That's right:  the majority of the deal is in MetLife stock - with only $6.8B in cash.  So, the Treasury will own MET stock also!  We're putting together quite the diversified insurance equity portfolio! (/sarcasm)

Then, of course, there's the matter of Treasury's $49B in preferreds, which will be converted to AIG common stock and sold over time.

In short, I'd say that today's headlines "AIG, US Government Agree on Exit Plan," might be just a slight distortion/exaggeration of the facts.  Yes - they have a plan - the plan is to sell assets and pay everyone back.  Of course, that was always the plan.  Today's "plan" still leaves us a long ways away from the day that the government will recoup all of it's AIG investments. 

All AIG has to do now is complete the sale of ALICO to Metlife, sell off the $9-odd billion of MetLife stock they receive, complete the sale of AIG Star Life and AIG Edison Life to Prudential,  manage to sell AIA for $25 Billion, and sell off over $50B of AIG common stock!  We'll be watching the progress...



M. Terry said...

KD, Agree completely, but my numbers come out a little different.

Pay back FRBNY with the proceeds of Series F preferred, pay off Series F with sale/ipo of AILCO and AIA + 167MM shares of equity.

Series G - used to supplement series F (assume $2B and equiv value of shares)-

Series C (balance sheet value of $23B)converts to 563MM shares;

Series E preferred (balance sheet value of $41B) converts to 924MM shares of common.

Gives me a minimum exchanged value of $64B.

Am I missing something?


Kid Dynamite said...

Mike - how can I get in touch with you? There's a potentially bigger story here, but it sounds like you might have the answers... regarding the 80% warrants.

let me know how to get in touch with you.

as for the other numbers - i was simply using AIG's press release from today (linked in the article)

EconomicDisconnect said...

What a tease! I hope you two connect!

Who is chomping on oreos!!!!