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AIG Announces Plan to Repay U.S. Rescue With Stock

American International Group Inc. agreed to wind down its $182.3 billion bailout by converting the Treasury Department stake into common shares for sale, a step toward independence for the insurer whose near collapse two years ago threatened the global economy. The company gained 3.4 percent in New York trading.

Treasury will swap its preferred stake of $49.1 billion for 1.66 billion shares of common stock and then sell the holdings in the open market, AIG said today in a statement. The Treasury investment will break even if shares are sold at about $29 each. The sales will happen in phases over 18 months to two years, said a person with direct knowledge of the plan who declined to be identified because the schedule isn’t public.

AIG, once the world’s largest insurer, turned over a majority stake to the government in exchange for a rescue that swelled to $182.3 billion. Federal Reserve Chairman Ben S. Bernanke has said the bailout, a day after the September 2008 failure of Lehman Brothers Holdings Inc., made him “more angry” than any other episode in the financial crisis.

“The government got lucky because the markets recovered and it looks like the bailout will work,” said Phillip Phan, professor at the Johns Hopkins Carey Business School in Baltimore. “Economists will be debating for a long time about whether the rescue was a good thing. My concern is the next time a company starts to look iffy, it becomes a very convenient argument to jump in and say, ‘We’ll do another AIG.’”

Shares Surge

The insurer rose $1.28 to $38.73 in New York Stock Exchange composite trading at 11:07 a.m. AIG gained about 25 percent this year through yesterday. It slipped 4.5 percent last year and plunged 97 percent in 2008.

AIG will retire its Federal Reserve credit line, using proceeds of asset sales, and issue stock to Treasury by the first quarter of next year, the New York-based insurer said in the statement. The debt on the Fed line is about $20 billion.

The company’s common shareholders, who hold about 20 percent of the company, will have their stake diluted to about 7.9 percent, AIG said. Those investors will receive as many as 75 million warrants with a strike price of $45.

“This agreement vastly simplifies current government support of AIG, sets forth a clear path for AIG to repay the Federal Reserve Bank of New York in full, and sets in motion the steps for the U.S. Treasury to exit its ownership of AIG,” Chief Executive Officer Robert Benmosche said in the statement. “With this plan under way, we can concentrate our full attention on managing our businesses.”

AIA, Alico

The insurer will transfer interests in special purpose vehicles holding stakes in AIG divisions to the Treasury from the Fed. AIG will tap as much as $22 billion from a Treasury facility for the transactions, which involve non-U.S. divisions American Life Insurance Co. and AIA Group Ltd.

AIG will repay the sum with proceeds from asset sales. MetLife Inc. said its purchase of Alico for about $15.5 billion will be completed on Nov. 1, and AIG plans to hold a public offering for AIA this year.

AIG was deemed by the Treasury a “systemically significant failing institution” and was the only company to receive bailout funds through a facility created for such firms. AIG had reported the biggest quarterly loss in U.S. corporate history in 2008 and posted almost $100 billion in net losses that year, fueled by bets on subprime-mortgage securities. The business was akin to a hedge fund “attached to a large and stable insurance company,” Bernanke said last year.

Benmosche, Miller

UnderBenmosche, 66, who last year became the insurer’s fourth head since 2008, AIG is focusing on property-casualty coverage and U.S. life insurance and retirement products. The company, which shrank the derivatives unit, benefited from a rebound in corporate debt holdings and investments in private- equity and hedge funds.

The insurer’s managers “strongly believe, given how powerfully AIG and its businesses have rebounded” that AIG will repay the U.S. at a profit, Chairman Steve Miller and Benmosche said today in a joint letter to employees.

Treasury Secretary Timothy F. Geithner said the plan “dramatically accelerates” the timeline for AIG’s repayment.

“While there is a lot of work ahead to execute the terms of this agreement, today we are much closer to seeing a clear path out,” Geithner said in a statement today.

Treasury invested about $47.5 billion in AIG buying preferred stock, and the insurer owed $1.6 billion in interest. Based on the $47.5 billion investment, the conversion would give Treasury shares at $28.70 each. AIG was allowed to skip interest payments starting last year as part of its fourth rescue.

Fairholme’s Berkowitz

Fairholme Capital Management, the investment firm run by Bruce Berkowitz that bet on AIG’s recovery, said in a statement that it “strongly” supports the restructuring plan. Fairholme said it invested more than $1.8 billion in AIG stock and debt, and owns about 24 percent of AIG’s privately held common shares.

AIG has announced more than 30 asset sales, divesting a U.S. auto insurer, more than 50 aircraft from its plane-leasing unit and Israeli and Canadian mortgage guarantors. In August, Benmosche agreed to sell a majority stake in its consumer lender to Fortress Investment Group LLC, getting rid of a unit that had accumulated more than $17 billion in debt.

AIG is the only insurer left to repay its Troubled Asset Relief Program rescue funds. Hartford Financial Services Group Inc. and Lincoln National Corp. repaid their bailouts, and Treasury raised more than $900 million selling warrants in the companies.

Skipped Dividends

Bailout recipients including JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. repaid TARP funds, plus interest payments on preferred shares. AIG had two directors assigned to its board by Treasury after missing dividends on the preferred shares for four straight quarters.

Treasury Chief Restructuring Officer Jim Millstein has said he expects sufficient demand from private investors if the company’s core insurance operations earn about $8 billion a year. Such businesses posted more than $4 billion in profit in the first half of this year.

Geithner said Sept. 22 that the U.S. would “largely get the taxpayers’ money back” from TARP. Projections for losses on the $700 billion program are shrinking, Geithner said, citing a Congressional Budget Office estimate that TARP would cost $66 billion, compared with $105 billion in an earlier Treasury report.

‘Backdoor Bailout’

The AIG rescue has been criticized by lawmakers as a “backdoor bailout” of financial firms including Goldman Sachs and Societe Generale SA because the banks were fully reimbursed on contracts tied to $62.1 billion in securities that had plunged in value. Neil Barofsky, the special inspector general monitoring TARP, is investigating whether the New York Fed improperly limited the release of information about payments to AIG counterparties.

AIG was first rescued in September 2008 by the Fed after trading partners demanded payments on derivative contracts. After three revisions, the firm’s lifeline included the $60 billion Fed credit facility, a Treasury investment of as much as $69.8 billion and up to $52.5 billion to buy mortgage-linked assets owned or backed by AIG.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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