Treasury to Sell $18 Billion in AIG Stock
Sep 10th 2012 10:11AM
Updated Sep 10th 2012 10:14AM
Over the weekend, the Treasury Department announced that it is selling $18 billion of insurance giant American International Group's (NYS: AIG) stock in a public offering. This is the fifth time in the last two years that the Treasury has sold shares, with the most recent sale of $5 billion in stock taking place in early August. But this particular sale is making headlines because its success means the government's stake in AIG would be reduced by more than half, and for the first time since 2008 the U.S. government would not be a majority stakeholder in the company.
A quick refresher: As the housing bubble expanded and the major Wall Street firms became more and more enthusiastic about obscure financial instruments like CDOs and mortgage-backed securities, they needed someone to insure their new toys. Enter AIG, which provided coverage (credit default swaps) for any and all takers, including the soon-to-be-toxic subprime-CDOs. When the floor fell out from under the housing market, AIG quickly discovered that it wasn't just overextended -- it was in over its head. As the crisis deepened, it became apparent that AIG couldn't dig itself out of the mess it had made, and that its collapse would mean the fall of major banks and investment firms throughout the U.S.
So the U.S. government stepped in, providing the company with the biggest bailout of the financial crisis: $182 billion. This meant that the government controlled 92% of the company, effectively nationalizing AIG. This was an incredibly controversial move, and the use of taxpayer money to take over a U.S. company has been criticized ever since. Many of the most vocal critics point out that the government has yet to recoup the losses it incurred from its bailout of AIG, which brings us to today.
With less than two months until the presidential election, people are wondering whether the sale of the government's shares in AIG isn't being timed to cast the Obama administration in a better light. The economy has been an important talking point throughout the presidential race, with Gov. Mitt Romney's campaign putting plenty of focus on the financial bailouts. However, after the last four sales of shares in AIG, the government has only $24 billion left invested in the company. Combined with the $18 billion in profit, interest, and fees the government has seen from these previous sales,, the success of this current sale would mean the U.S. government would have made a profit from its investment in AIG. It's almost certain that this will be a talking point in the presidential campaign throughout the coming weeks.
Whatever the cause behind the sale of the company's shares may be, AIG has been performing well as of late. The company's stock is up nearly 34% in the last 12 months, with a 41% rally since Jan. 1. AIG has also announced that the company will repurchase up to $5 billion of its own stock from the government in an effort to reduce its shares outstanding, potentially boosting future earnings per share. For the first time since 2008, AIG may truly be making a comeback, and Fools should definitely keep their eyes on it.
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The article Treasury to Sell $18 Billion in AIG Stock originally appeared on Fool.com.Fool contributor Mark Reeth owns none of the stocks mentioned above, but he is excited to see what happens next. Follow him @ChristmasReeth. Motley Fool newsletter services have recommended buying shares of American International Group. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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