American International Group has paid back about $62 billion of its $183 billion debt to the government, but whether it can repay the full amount remains uncertain, an official study concluded last week.
"The sustainability of any positive trends of AIG's operations and repayment efforts is not yet clear. The government's ability to recoup the federal assistance money depends on the long-term health of AIG," according to a General Accountability Office report.
And while the Federal Reserve and Treasury have taken steps to protect the government's interests, "risks still remain," according to the GAO, which concluded that "AIG's ability to divest its assets to make repayment relies heavily on conditions in financial markets."
The Fed and Treasury took "steps intended to protect the government's interest," GAO noted. "These include making loans that are secured with collateral, instituting certain controls over management, and obtaining compensation for risks such as charging interest, requiring dividend payments and obtaining warrants."
GAO added that "moreover, Federal Reserve and Treasury staff routinely monitor AIG's operations and receive reports on AIG's condition and restructuring."
Despite these efforts, "the government remains exposed to risks, including credit risk and investment risk, which could result in the Federal Reserve and Treasury not being repaid in full," GAO warned.
"GAO-developed indicators suggest that AIG's ability to restructure its business and repay the government is unclear at this time," GAO reported "After a declining trend through 2008 and early 2009, indicators of AIG insurance companies' financial risk suggest improved financial conditions that were largely results of federal assistance."
A copy of the GAO report is available at //www.gao.gov/new.items/d09975.pdf.
In related news, Standard and Poor's raised its opinion of AIG shares to "hold" from "sell," citing unconfirmed reports that Rep. Edolphus Towns, D-N.Y., who chairs the House Oversight and Government Reform Committee, is set to urge the Federal Reserve and Treasury to ease the terms of AIG's loan.
The notion of a revision in the rescue package is one that has been pushed by AIG's former chair, Maurice Greenberg, who has testified before Rep. Towns' committee, which has been examining the government bailout of the company.
"We see this news buoying the shares near term," S&P said. "We raise our target price by $15 to $45, assuming the shares trade at a discount to stated book value."
Rep. Towns believes AIG had previously been using a "fire sale" mentality to pay off its debts, but that might have changed with a new chief executive in place, according to a representative for Rep. Towns.
The spokesman said the congressman's remarks came in a meeting with Harvey Golub, current chair of AIG, and Mr. Greenberg, who had previously complained about "fire sales" at the company–in which he still retains a large stock interest.
Rep. Towns' committee had called Mr. Greenberg–now chair and CEO of C.V. Starr–to testify on April 2. He told the committee the government bailout plan was a failure, and that "a successful liquidation is impossible in the present economic climate since buyers for AIG assets at fair prices simply do not exist at this time. Fire-sale prices will bring taxpayers, who now own almost 80 percent of AIG, only pennies on the dollar for their investment in AIG."
Regarding his talk with Mr. Golub, Rep. Towns said the change in CEO to Robert Benmosche from Edward Liddy seems to be a positive, in that the new CEO does not buy into the fire-sale mentality of the recent past, his spokesman said.
Rep. Towns said Mr. Greenberg suggested that a change in the terms of the government payback agreement with AIG might help improve the chances of AIG repaying its government loans, and he has asked his staff to look into the issue, the congressman's spokesman added.
Officials from the Treasury and Federal Reserve declined comment.
Allison Bell is a senior editor with National Underwriter's life and health insurance edition.
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