CliffsNotes for AIG's Exit Strategy

AIG announced (.pdf) today how it intends to eventually escape government control. Its bailout was easily the most complicated of any other financial institution, so it should come as no surprise that its exit plan is also very complex. Here's the CliffsNotes version.

AIG got money from two places: The Federal Reserve Bank of New York and the U.S. Treasury. Let's start with the NY Fed.

The NY Fed

The NY Fed bought a slew of bad assets from AIG, close to $40 billion worth. Forget about those; for now the NY Fed is just keeping them. They aren't part of the exit plan. Their performance will determine if the NY Fed makes or loses money on the purchase.

But the NY Fed also provided AIG with money from two sources: a loan and preferred stock. The firm still owes $20 billion for the loan and $26 billion in preferred stock.

The $20 Billion Loan

AIG has some money on hand and will get some more through selling off divisions. That's what it will use to pay the $20 billion loan back. This is the easy part.

The $26 Billion Preferred Stake

The firm will gather up another $4 billion of its own money through asset sales to cover a portion of that $26 billion. The other $22 billion will be covered by the U.S. Treasury, which will increase its balance of preferred AIG shares to around $70 billion.

So the NY Fed will become whole under this plan. About half of the money it is owed will come from AIG and the other half from the Treasury.

The Treasury

This is where it gets complicated. The Treasury fails to provide a transparent explanation of its holdings of AIG or other bailout recipients on its website, and I am awaiting a callback. But here's my interpretation from AIG's press release., but the Treasury has confirmed the information from AIG's press release explained below.

$49.1 Billion Stock Conversion

The Treasury already has a preferred stake in AIG of $49.1 billion. It will be converted to 1.655 billion in common shares. This will increase the government's ownership of the firm to 92.1%. Some quick math shows that the Treasury would have to sell those shares for around $29.67 to get this portion of its money back.

$22 Billion New Preferred Stake

But that's not all the Treasury will own. It also will receive $22 billion in additional preferred shares from the NY Fed, as just explained above. According to AIG's press release, however, those shares won't be converted to common stock. Instead, AIG intends to be able to pay that back eventually in cash as assets continue to be sold off.

Will Taxpayers Get Their Money Back?

So it's conceivable that the Treasury could get its money back -- or even make a profit. It would depend a lot on AIG's performance between now and when the government begins to sell its stake. If the Treasury sells those shares for more than $29.67 per share (which is plausible as the stock is currently trading around $38), and if AIG is able to pay back the full $22 billion in preferred shares, then the Treasury will be made whole. Whether the entire bailout ultimately costs taxpayers also depends on the portfolio of assets that the NY Fed will continue to own, however.