NU Online News Service, June 22, 3:40 p.m. EDT

WASHINGTON--The U.S. government is likely to suffer a loss on its investment in American International Group (AIG), Treasury Secretary Timothy Geithner acknowledged Tuesday.

In testimony before the Congressional Oversight Panel (COP), Mr. Geithner said that while AIG is making progress in restructuring its operations, "the U.S. investments in AIG will likely still result in some loss."

Mr. Geithner's testimony is consistent with comments made at a June 10 hearing by COP staffers, and by analysts from Standard & Poor's and casualty research at Keefe, Bruyette and Woods (KBW), New York.

But the comments run counter to testimony Federal Reserve Board Chairman Ben Bernanke delivered at a recent House Budget Committee hearing.

Mr. Bernanke said he believes AIG will repay the government, and that the direct cost to taxpayers for shoring up financial institutions, including AIG, through the Troubled Asset Relief Program would be "really quite small and may, in the end, be in fact a profit."

The Federal Reserve Board loaned AIG $85 billion in September 2008 after the declining value of credit default swaps it had issued to insure mortgage-backed-securities put pressure on the company to give the counterparties more capital.

To collateralize the original loan, AIG gave the Fed 79.9 percent of its stock.

Before AIG began paying back the government through securities sales and sales of some of its subsidiaries, the U.S. investment in AIG reached $182 billion.

In his comments about AIG, Mr. Geithner said the company is winding down its Financial Products subsidiary, "where much of that risk was concentrated."

Moreover, he said, the company is working to divest two of its largest foreign insurance subsidiaries, and the proceeds will be used to pay down its loan from the Federal Reserve.

And, Mr. Geithner added, "AIG's core businesses are generating profits."

The COP, in a June 10 report, said the AIG bailout poses an "extraordinary risk to taxpayers" and questioned whether the government will ever get all its money back.

Rodney Clark, a managing director at Standard & Poor's Rating Services, told the COP on June 10 that AIG would likely need an infusion of private capital in order to succeed once the government ceased its involvement in the company.

Cliff Gallant of KBW agreed. He told the oversight panel that AIG common shares are "grossly overvalued," and he said AIG "may eventually need to raise significant equity capital from public markets in order to fully stand alone."

Special Reports /

AIG Bailout May Result In Loss, Geithner Says

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