American International Group has planned to transfer American International Assurance Co. and American Life Insurance Co to the Federal Reserve Bank Of New York. Those exchanges will lower its debt to the government by $25 billion. If the Fed decides to cash in on those companies and it makes more than $25 billion, then AIG will be entitled to keep the additional proceeds. The company said that due to a reduction in the credit line, it will take a $5.7 billion charge in the fourth quarter, in addition to a previously disclosed $1.4 billion accounting expense linked to the sale of a Taiwan unit.
Paying Back Bailout
In June AIG’s bailout was valued at $182.5 billion, which included a $60 billion Fed credit line, a $70 billion investment from the Treasury and $52.5 billion to fund two vehicles to retire credit-default swaps and their securities-lending program.
In March, the firm revealed plans to transfer the businesses amid its fourth bailout. These transfers allow AIG to pay down its debts while waiting for credit markets to recover. By doing so they attempt to receive higher prices for the assets that are being sold. Since the bailout, AIG has secured deals for about $12 billion in sales for assets including a U.S. auto insurer, banking units and a Japanese office tower. AIG said in the statement that the total size of the Fed credit line has been reduced to $35 billion from $60 billion, and this contributed to the fourth-quarter charge.
TARP Winding Down
Other financial institutions are also looking to pay down loans that they received during the financial crisis. According to a top official in the Obama administration, the government will outline its plan to start winding down the $700 billion financial rescue program in the next few weeks. This however, does not mean that it will expire by the end of the year.
The $700 billion Troubled Asset Relief Program was passed last year at the height of the financial collapse last year and is set to expire this year, but they can extend it until 2010 if necessary. However, many have criticized the Treasury’s bailout of Wall Street at the expense of the taxpayer so it may be difficult for the government to extend the program.
Taxpayers To Get Billions Back
Auctions of warrants demanded by the government for bailing out banks will be held soon and could provide taxpayers with some relief that their money is being repaid. Some of these banks include Capital One Financial Corp., JP Morgan Chase & Co and TCF Financial Corp.
The Treasury Department started auctioning 12.7 million warrants in Capital One, which could return taxpayers with more than the $105.2 million in dividends paid to the government in June. This was when the bank repaid $3.56 billion in TARP funds that was received in November 2008. Linus Wilson, a University of Louisiana finance professor, provided a minimum estimate of $1.35 billion for the three auctions.
Treasury may be able to bring in $1.08 billion to $2.72 billion through the sale of 88.4 million JPMorgan warrants, which expire in 2018. JP Morgan has also paid the Treasury dividends since receiving $25 billion in bailout money. The Treasury has said it will conduct similar auctions in the future as banks repay their TARP stakes. According to the Treasury, there are 693 banks in the capital purchase program. Banks have the option to repurchase the warrants, as Goldman Sachs Bank USA Group Inc. did for $1.1 billion. These auctions and AIG’s transfer of companies to the Federal Bank of New York can all benefit taxpayers by reducing the risk shared by the public (by bailing out these companies).