American International Group on Thursday announced it had agreed to wind down its $182.3 billion bailout by converting the Treasury Department stake into common shares for sale, a step toward independence for the insurer whose near collapse two years ago threatened the global economy.
Treasury will swap its preferred stake of $49.1 billion for 1.66 billion shares of common stock and then sell the holdings in the open market, AIG said in a statement. The Treasury investment will break even if shares are sold at about $29 each. The sales will happen in phases over 18 months to two years, said a person with direct knowledge of the plan who declined to be identified because the schedule isn’t public.
AIG, once the world’s largest insurer, turned over a majority stake to the government in exchange for a rescue that swelled to $182.3 billion. Federal Reserve Chairman Ben S. Bernanke has said the bailout, a day after the September 2008 failure of Lehman Brothers Holdings Inc., made him “more angry” than any other episode in the financial crisis.
AIG will retire its Federal Reserve credit line, using proceeds of asset sales, and issue stock to Treasury by the first quarter of next year, the New York-based insurer said in the statement. The debt on the Fed line is about $20 billion.
The company’s common shareholders, who hold about 20% of the company, will have their stake diluted to about 7.9%, AIG said. Those investors will receive as many as 75 million warrants with a strike price of $45.
“This agreement vastly simplifies current government support of AIG, sets forth a clear path for AIG to repay the Federal Reserve Bank of New York in full, and sets in motion the steps for the U.S. Treasury to exit its ownership of AIG,” CEO Robert Benmosche said in the statement. “With this plan under way, we can concentrate our full attention on managing our businesses.”
AIG was deemed by the Treasury a “systemically significant failing institution” and was the only company to receive bailout funds through a facility created for such firms. AIG had reported the biggest quarterly loss in U.S. corporate history in 2008 and posted almost $100 billion in net losses that year, fueled by bets on subprime-mortgage securities.
Treasury Secretary Timothy F. Geithner said the plan “dramatically accelerates” the timeline for AIG’s repayment.
“While there is a lot of work ahead to execute the terms of this agreement, today we are much closer to seeing a clear path out,” Mr. Geithner said in a statement.
Treasury invested about $47.5 billion in AIG, buying preferred stock, and the insurer owed $1.6 billion in interest. Based on the $47.5 billion investment, the conversion would give Treasury shares at $28.70 each. AIG was allowed to skip interest payments starting last year as part of its fourth rescue.
On March 29, AIG sold its third-party money management business, AIG Investments, to Hong Kong-based Pacific Century Group for $277 million in cash and further potential payments. AIG had priced the unit, renamed PineBridge Investments, at $500 million when it was put up for sale in September 2009.
The business had $87.3 billion in assets when it was sold. Institutional clients accounted for 44.8% of the PineBridge’s assets, with retail clients contributing 23.6%, and AIG and its insurance affiliates accounting for the remaining 31.6%.
Reporter Douglas Appell contributed to this story.