Don't Celebrate AIG's $25 Billion Debt Elimination Yet

There's big news today that AIG has eliminated $25 billion of its debt with the New York Federal Reserve by exchanging it for preferred shares in two of its business units. Now it only owes the New York Fed and Treasury $62 billion in debt. Should we be impressed by this debt for equity swap? I'm not -- yet.

Here's a quote from AIG via CNN Money:

"The agreements further the goals of enabling AIG to fully repay the assistance that it has received from U.S. taxpayers and advancing the company's global restructuring process," the New York Fed said in a statement when the deal was first announced in March.

Right, except this action doesn't really result in the NY Fed getting its money. It just exchanged one asset for another, but preferred shares aren't cash. Indeed, the New York Fed went from being less of a creditor to being more of a shareholder. Taxpayers still have that $25 billion exposure to AIG, just in a different form.

The reason some might be happy about the debt for equity swap is that the NY Fed might be able to sell equity more easily than debt. So could this result in the Fed getting its money back? Maybe, but we won't know for sure until the NY Fed sells that equity. Indeed, it might not sell the equity at par, so it could still incur a loss on that $25 billion. Or it could sell the shares for more than that amount and make a profit.

The problem is that we just don't know yet how the equity will sell in the market. That's why I'm not too excited about this news just yet. If we hear that the NY Fed sells that equity for at least $25 billion in cash, then we can begin celebrate. Even then, however, there's still another $62 billion in debt to worry about.