Will AIG Pay Back Uncle Sam?


If you’re still confused about what caused the financial meltdown, you’re not alone. It was a complicated mess to say the least. But now the terms of the taxpayer funded bailout provided to one of the key players, American International Group, Inc. (AIG), are being scrutinized by a Congressional panel that’s reviewing the government bailouts.

AIG is essentially a giant insurance company which underwrote many of those mortgage back securities that are at the heart of the financial meltdown. When those securities tanked, AIG was on the hook for billions of dollars. The fear was that if AIG defaulted, then the financial system would totally collapse. So the federal government stepped in and gave AIG more than $130 billion in an effort to stabilize the banking sector and AIG itself.

The Congressional Oversight Panel held a hearing this week to investigate the financial assistance provided to AIG (Stock Quote: AIG) under the Troubled Asset Relief Program. The outcome? It’s still unclear if AIG will be able to fully pay back the $132.3 billion in aid it received since its 2008 bailout, which was provided via The Treasury Department and by the Federal Reserve

While AIG Chief Executive Robert Benmosche stated that profits had increased and AIG was “on a clear path to repaying taxpayers,” other representatives called to testify were less optimistic about the company’s financial status.

“While our outlook on the company’s stand-alone credit profile is positive, we maintain our negative outlook on the company going forward,” Rodney Clark, Managing Director of Standard & Poor’s Insurance Ratings, said in the hearing. “The negative outlook reflects uncertainty with regard to legislative risk and its potential impact on the government’s ability to continue to provide extraordinary support to AIG, if needed.”

Clark explained that Standard & Poor’s current semi-favoriable”A-“rating of AIG was dependent of the existence of the federal funding.  

Additionally, while AIG has agreed to pay back the $83.2 billion it owes the Federal Reserve (possibly with interest), repayment on the $49 billion loan from the Treasury Department still remains a question.

According to James Millstein, the Chief Restructuring Officer of the Treasury Department tasked with overseeing specifically AIG’s restructuring, the return on these taxpayers investments “will largely depend on the performance of the then-remaining businesses in the AIG portfolio after it completes its asset sales and how they are valued in the stock market.”

The Congressional Oversight Panel was created in 2008 after Congress gave the Treasury Department the authority to spend $700 Billion on economic relief efforts. It is the panel’s job to oversee the expenditures of the Troubled Asset Relief Program (TARP) and to provide recommendations for future regulatory reform. Its recent investigation into AIG is an attempt to determine how much, if any, of the money given to the failing bank was necessary for economic stabilization. (In essence, the panel is trying to answer a question MainStreet asked earlier: Do government bailout really work?”)

“The rescue of [AIG] was so extraordinary that it bypassed the entire legal process of bankruptcy,” Elizabeth Warren, Chair of the Congressional Oversight panel, said at the hearing. “In saving AIG, the government invented a new process out of whole cloth, a parallel set of rules devised and executed for the benefit of only one company.”

She added “no matter the justification, the fact remains that AIG’s rescue broke all the rules, and each rule that was broken poses a question that must be answered.”

Benmosche maintained that the bailout was necessary, noting that “were it not for the commitment of the U.S. government at a time of great uncertainty, AIG would not be on the path it is today.”

AIG reported $1.5 billion in first-quarter profits earlier this month. The Congressional Oversight Panel will release it complete report on its findings (and subsequent recommendations) regarding the AIG bailout in June.

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