Wall Street Fees Dwindle on AIG Offerings as Insurer Buys Stock
Wall Street’s fees are dwindling on U.S. Treasury Department sales of American International Group Inc. (AIG) shares as the insurer buys back some of its own stock from the government to help wind down a 2008 bailout.
Citigroup Inc. (C), Credit Suisse Group AG (CSGN) and Morgan Stanley earned 10.9 cents a share when the Treasury sold stock at $29 last week, a regulatory filing shows. That compares with 14.5 cents in an offering in May when the U.S. divested shares at the same price. Half of last week’s $6 billion sale was to AIG, which didn’t pay underwriters for its purchase. In May, AIG was a seller, increasing Wall Street fees.
The Treasury will need more share sales to exit its 70 percent stake in New York-based AIG as it seeks to wind down bailouts from 2008 and 2009 that were designed to prevent a collapse of the banking system and protect jobs. Underwriting fees in the most recent AIG offering were 0.375 percent, compared with a 3.04 percent average of U.S. additional equity offerings last year, according to data compiled by Bloomberg.
“A sale like this could be a very consuming activity for a bank,” and underwriters probably had “slim” margins, said Sica Wealth Management LLC Chief Investment Officer Jeffrey Sica. “The Treasury has made them do something they wouldn’t ordinarily do.” His Morristown, New Jersey-based firm oversees more than $1 billion.
The government needs to sell its stake at an average of at least $28.72 a share to recoup taxpayer funds. AIG is responsible for paying banks for underwriting the offerings. Mark Herr, a spokesman for the insurer, and the Treasury’s Matthew Anderson declined to comment, as did representatives of Citigroup, Morgan Stanley (MS) and Credit Suisse.
The government has arranged fees of less than 1 percent for its sale of stock in other firms rescued in 2008 and 2009. Banks made 0.75 percent on the $18.1 billion sale of General Motors Co. (GM) shares and 0.4 percent on a $10.5 billion offering of Citigroup shares in 2010, according to data compiled by Bloomberg. The Treasury holds about a third of GM’s common shares.
The expectation of future share sales by the Treasury has weighed on AIG’s stock in recent months, since investors assumed the government would sell if shares climbed to the break-even price, said Josh Stirling, an analyst at Sanford C. Bernstein & Co. AIG’s repurchase of half the recent offering reduced the number of shares outstanding and removed some of that pressure, he said.
“If this represents the approach the Treasury will continue to take as it distributes shares in the future, assuming an improving broad market, the government’s cost basis should switch from being a ceiling to a floor,” Stirling said in a note to clients last week.
He rates the insurer market perform, which means the stock will probably trade within 15 percent of the Standard & Poor’s 500 Index during the next year. AIG advanced 25 cents yesterday to $28.40.
AIG and the Treasury are prevented from selling additional shares for 60 days after the most recent offering, according to an agreement with underwriters. Banks are able to waive that condition if they choose.
AIG has sold more than $50 billion in assets, including non-U.S. life insurers, a consumer lender and an asset manager, to help repay a taxpayer bailout that swelled to $182.3 billion. The Treasury converted a preferred stake into 92 percent of the company’s common shares in January 2011.
That holding was reduced to 77 percent in a May offering that raised $5.8 billion for the government. AIG sold an additional $2.9 billion of its stock alongside the Treasury in that transaction to prove that it could access equity markets.
Goldman Sachs, JPMorgan
Underwriters on the 2011 offering included Bank of America Corp. (BAC), Deutsche Bank AG (DBK), Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM) Fees for the sale totaled $43.5 million for 300 million shares.
Last week’s sale generated $11.3 million in underwriting fees on about 103 million shares offered to investors excluding AIG, according to the filing. Morgan Stanley, Citigroup and Credit Suisse accounted for more than 95 percent of the securities sold.