NU Online News Service, Jan. 21, 8:48 a.m. EST
The Government Accountability Office has issued a report stating that the government’s ability to make a profit on its investment in American International Group now depends on the economy and the ability of AIG’s management to grow the business.
The report came just a week after AIG and the Treasury Department announced they had established a strategy for the government to end its involvement with AIG.
The GAO said, “The government’s, and thus the taxpayer’s, exposure to AIG increasingly is expected to be tied to the success of AIG, its ongoing performance, and its value as seen by investors of AIG’s common stock.”
The GAO said the sustainability of any positive trends in AIG’s operations “depends on how well AIG manages its business, and the government’s ability to fully recoup the federal assistance will be determined by the long-term health of AIG and subject to uncertainty arising from the likelihood of future changes in general economic, regulatory, and market conditions.”
Under the deal announced last Friday, AIG exchanged its debt to the Treasury Department for additional stock that will bring the Treasury’s stake in AIG up to 92 percent of its common equity.
The Treasury said its total cash investment in AIG is now $68 billion.
AIG also repaid in cash the $21 billion remaining on the credit facility it had with the Federal Reserve Board.
In its report, the GAO said that, largely due to federal assistance, “AIG’s financial condition has generally remained relatively stable or showed signs of improvement since GAO’s last report in April 2010.”
It was primarily based on AIG’s financial status as of Sept. 30, 2010, the end of the government’s fiscal year.
The report said that, overall, federal assistance appears to be facilitating a more orderly restructuring of the company.
The report added that several indicators show that AIG Financial Products (AIGFP) has continued to unwind its credit default swap positions and its portfolio of super senior credit default swaps.
AIGFP’s involvement in credit default swaps on collateralized debt obligations caused its parent conglomerate to sustain billions in losses.
The GAO report also said that “several indicators show that [AIG’s] insurance operations are showing signs of recovery, but federal assistance has been a critical factor.”
The report said that in the first three quarters of 2010, additions to AIG life and retirement policyholder contract deposits exceeded withdrawals, and the company’s pretax operating incomes, which increased slightly in 2009, remained positive.
AIG’s property and casualty companies “remain stabilized,” the report said.
A key factor in the lessening role of the government in AIG was the exchange of debt for stock by the government through $40 billion in federally-owned preferred interests in AIG and $25 billion in special purpose vehicles that own shares in the AIG spinoffs AIA Group Limited and American Life Insurance Company.
“As a result of this shift from debt to equity, which has occurred gradually, the authorized amount of the facility has decreased and the amount of preferred equity interests held in AIG and various SPVs for the government has increased,” the report said.
For example, the report said, as of Sept. 30, 2010, the amount of assistance available to AIG through the facility had been reduced to $29.2 billion, and the amount AIG owed the facility was reduced to $20.5 billion.
Also, the GAO said, the Federal Reserve Bank of New York’s preferred interests in the special purposes created to hold the shares of AIA and ALICO have increased nearly $1 billion, and the Series F stock held by the Treasury has increased more than $2 billion since Dec. 31, 2009.