GAO: Fate of AIG bailout now rests with the stock market

On Jan. 14, AIG announced that it had completed a restructuring plan that would ultimately free it of government ownership. The company repaid the $47 billion it owed the Federal Reserve Bank of New York, leaving the Treasury Department as the sole government supporter of the company. The plan left the Treasury with 1.6555 billion shares of AIG common stock, which the department plans to sell back to the public over the next few years to recoup its investment.

Treasury Secretary Timothy Geithner praised the move at the time, saying in a statement that it puts the government “in an excellent position to begin realizing value for taxpayers.

“Treasury remains optimistic that taxpayers will get back every dollar of their investment in AIG,” he added.

However, that wholesale shift into stock ownership means the government’s ability to obtain a return on its investment is now largely in the hands of AIG and the stock market.

“The government’s, and thus the taxpayer’s exposure to AIG increasingly is expected to be tied to the success of AIG, its ongoing performance, and its value as seen by investors of AIG’s common stock,” the GAO stated. “The government’s ability to fully recoup the federal assistance will be determined by the long-term health of AIG and subject to uncertainty arising from the likelihood of future changes in general economic, regulatory, and market conditions.”

In response to the study, Treasury maintained its confidence that taxpayers would ultimately be repaid for the AIG bailout.

“With the closing of AIG’s recapitalization agreement, we are moving closer than ever toward a day that many thought impossible just a few years ago, as taxpayers are in a strong position to recover every dollar put into AIG,” said Tim Massad, the Treasury’s acting assistant secretary for financial stability. “AIG has already paid back the Federal Reserve and taxpayers are next in line to recoup their stake in the company.”

The department has had a fairly good track record in recent history with selling stock of bailed-out firms. In December, the department made $13.5 billion after a successful initial public offering of 441 million shares of General Motors’s stock. And it turned a $12 billion profit on its bailout of Citigroup after selling 7.7 billion of company shares it bought during the crisis.

—This post updated at 2:52 p.m.