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The Execution of the AIG Exit Plan

On January 14, American International Group (AIG), paid down the remaining balances on its loans at the New York Fed—removing the Fed from any direct exposure to AIG, and in accordance with a recapitalization plan announced on September 30, 2010. According to the plan, the revolving credit facility was to be repaid, along with interest and fees, and the preferred interests held by the New York Fed in two AIG subsidiaries (AIA, ALICO) were to be bought by AIG. The figure below shows that those two balances are now at zero.

Figure 1. Assistance to American International Group

The way in which AIG exited from its assistance is worth a closer look. The very first form of assistance extended to AIG was a revolving credit line with a maximum balance of $85 billion. This credit facility was created the day after Lehman Brothers collapsed in September 2008, and it was backed by a nearly 80 percent equity interest in AIG. By November 2008, AIG was facing a potential credit-rating downgrade and a subsequent spike in collateral calls, so the New York Fed restructured its assistance and created the limited liability companies Maiden Lane II and Maiden Lane III. As a result, AIG was relieved of some of the constraints on its liquidity, and the limit on the credit facility was dropped to $60 billion. Similar problems again appeared in March 2009 and were followed by another restructuring of the aid, this time dropping the credit limit to $25 billion in exchange for preferred interests in two of AIG’s subsidiaries. The finalization of this second restructuring did not take place until December 2009.

Throughout this extended period, ranging from September 2008 to January 2011, AIG has been raising cash through the sale of many of its subsidiary companies. While the majority of these sales have been relatively small, the two most important and public have contributed the most toward AIG’s repayment. The first sale, agreed upon in March 2010, gave MetLife control of American Life Insurance Company (ALICO). AIG received $16.2 billion for the sale, $7.2 billion of which was cash and $9 billion was MetLife securities. After a dispute with Prudential Financial and its board over the sale of AIA, AIG eventually conducted an initial public offering of AIA Group (AIA) on the Hong Kong Stock Exchange in October 2010. The offering for two-thirds of the subsidiary brought in $20.5 billion in cash for AIG. The majority of the $27.7 billion in cash collected in these two transactions was held in an escrow account at the New York Fed starting in November 2010. This cash balance is where the funds for repayment were drawn from.

In executing the plan, AIG used the escrow account funds to first pay off the remaining balance of the credit facility, supplying $19.9 billion to eliminate that balance. In addition, the commitment by the New York Fed to lend any further funds was terminated ahead of the credit facility’s scheduled expiration in September 2013. Approximately another $6 billion in the escrow account was used by AIG to repurchase preferred interests in AIA and ALICO from the New York Fed. The remaining preferred interests were purchased by AIG using a $20 billion loan from the Treasury’s Troubled Asset Relief Program (TARP), and those interests were then transferred to the Treasury. What remains on the Federal Reserve’s balance sheet are the two Maiden Lanes, but these are indirect obligations and they have been covered in depth before on this website.

Figure 2. Maiden Lane II
Figure 3. Maiden Lane III

So where does this leave the taxpayer? With respect to the Federal Reserve, AIG is no longer liable for any obligations. Maiden Lane II and Maiden Lane III currently hold portfolios with values greater than their outstanding loans from the New York Fed, so barring any unforeseen financial crises, the Fed will not lose money. In fact, once all fees, interest, and deferred payments have been disbursed, the New York Fed is currently in line to collect roughly $3.9 billion profit. The Treasury retains a large 92 percent equity interest in AIG. This interest is composed of newly converted common shares from a mix of sources, including the 80 percent share initially received by the New York Fed, the preferred shares of AIA and ALICO, and two separate preferred stock series issued to the Treasury through TARP.

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