AIG’s Benmosche Says Taxpayers Will Get Money Back
“I’m confident you’ll get your money, plus a profit,” Benmosche told the Congressional Oversight Panel in Washington today in a hearing to examine the rescue and U.S. taxpayer’s prospects of being repaid. “We are a strong, vibrant company.”
The insurer will repay a Federal Reserve credit line after the sales of two non-U.S. life insurance divisions are completed this year for about $51 billion and then turn to Treasury Department obligations, Benmosche said. New York-based AIG posted net income of $1.45 billion in the first quarter and raised money for its plane-leasing unit in the private market for the first time since its 2008 rescue.
“There are a lot of things that have to occur before we’ll know” whether AIG can fully repay the U.S., said Jim Millstein, the Treasury Department’s chief restructuring officer. The value of Treasury’s AIG investment depends on the performance of its insurance units and its stock valuation, he said.
The insurer could earn $6 billion to $8 billion next year, after taxes and accounting charges, Benmosche testified.
AIG’s 8.175 percent junior subordinated debentures due in 2058 climbed 5.75 cents to 72.75 cents on the dollar, the biggest jump of any actively traded financial-company corporate bond today, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The bailout includes as much as $69.8 billion from Treasury, a $60 billion Federal Reserve credit line and up to $52.5 billion to buy mortgage-linked assets owned or backed. AIG’s rescue may result in a $45.2 billion loss, based on March 31 data, Treasury said last week.
Benmosche addressed the panel after Cliff Gallant, a KBW Inc. analyst who cut the stock to “underperform” last month on the prospect that meeting U.S. obligations may wipe out common shareholders. AIG shares, which closed today at $34.05 in New York Stock Exchange composite trading, may be worth $6 in an optimistic scenario within a year, Gallant wrote.
When asked why the stock trades for more than his projected value, Gallant said buyers of the shares may assume the government will again relax bailout terms for the insurer.
‘See if He Understands’
“You’ll have to see if he understands the company as well as I do,” Benmosche said, when asked about Gallant’s analysis.
The CEO’s response was criticized by Damon Silvers, a member of Chairman Elizabeth Warren’s oversight panel.
“Mr. Benmosche, that’s not an acceptable answer,” Silvers said. “We’re trying to look out for your majority stockholder. I am frankly frightened by what Mr. Gallant said on behalf of the American public.” AIG agreed to turn over a stake of almost 80 percent as part of the bailout.
AIG hasn’t been paying dividends to the Treasury on more than $40 billion of preferred shares, which Warren estimated resulted in $5 billion in lost payments.
“These are dividends the company could not afford to pay,” Millstein told Warren. “At this point, the company’s net income, after taxes, are insufficient to support a preferred dividend.”
When asked about Gallant’s review of AIG, Millstein said that it would be inappropriate to critique the report because he knows “much more material, non-public information” than the analyst does about AIG.
AIG slipped 44 cents, or 1.3 percent, in New York Stock Exchange composite trading at 4:15 p.m. The company has climbed about 14 percent this year after falling 4.5 percent in 2009 and plunging 97 percent in 2008.
The New York Federal Reserve will probably hold the mortgage-linked securities obtained as part of the rescue until they mature, said Thomas C. Baxter, the general counsel for the regulator.
“The value-maximizing strategy has been largely to hold the assets to maturity while collecting interest income and principal repayments,” Baxter said in prepared testimony. He repeated that the Fed doesn’t expect to record a loss on the holdings.
Benmosche testified before congressional overseers for the first time since joining AIG in August. The panel was created to oversee the Troubled Asset Relief Program, which helped fund AIG’s rescue. Benmosche has told employees he would delay asset sales until he received fair prices, a strategy which has begun to reap gains, he said today. He plans to scale back businesses including derivatives trading, consumer lending and airline leasing.
‘Enhance the Nucleus’
“We will be the world’s largest property-and-casualty insurer with a strong life and annuity business in the United States and other selected businesses that will enhance that nucleus and core,” he said.
The largest deal struck by Benmosche is to sell AIA Group Ltd. to Prudential Plc for about $35.5 billion. Prudential needs support of 75 percent of investors at a June 7 shareholder vote to approve the purchase of AIA, which operates in countries from Australia to China.
Millstein said after the hearing that deals usually win shareholder approval when they have board support. AIG previously had plans in place for a public offering of AIA and could dispose of the division that way if the Prudential deal falls through, he said.
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