Troubled Asset Relief Program:

The Government's Exposure to AIG Following the Company's Recapitalization

GAO-11-716: Published: Jul 18, 2011. Publicly Released: Jul 18, 2011.

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Thomas J. McCool
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Assistance provided by the Department of the Treasury (Treasury) under the Troubled Asset Relief Program (TARP), and the Board of Governors of the Federal Reserve System (Federal Reserve) to American International Group, Inc. (AIG) represented one of the federal government's largest investments in a private sector institution. AIG is a holding company that, through its subsidiaries, engages in a broad range of insurance and insurance-related activities in the United States and abroad. As part of GAO's statutory oversight of TARP, this report updates a set of indicators GAO last reported in January 2011. Specifically, GAO discusses (1) trends in the financial condition of AIG and its insurance companies, (2) the status of the government's exposure to AIG, and (3) trends in the unwinding of AIG Financial Products (AIGFP). To update the indicators, GAO primarily used available public filings as of March 31, 2011, and more current publicly available information; reviewed rating agencies' reports; and identified critical activities and discussed them with officials from Treasury, the Federal Reserve, and AIG. Treasury, the Federal Reserve, and AIG provided technical comments that GAO incorporated, as appropriate.

Largely due to the federal assistance Treasury and the Federal Reserve provided to AIG, as measured by several indicators, AIG's financial condition generally has remained relatively stable or showed signs of improvement since GAO's last report in January 2011. However, the company recently recorded losses because of claims resulting from earthquakes and floods, in particular the ones that hit Japan in March 2011. As of March 31, 2011, the outstanding balance of the Federal Reserve and Treasury assistance to AIG was $85 billion, down from $123.1 billion in December 2010 (see table). Also, several indicators on the status of AIG's insurance companies illustrate that its insurance operations are showing signs of recovery. In particular, throughout 2010 and into the first quarter of 2011, additions to AIG life and retirement policyholder contract deposits exceeded withdrawals. In addition, AIG's property/casualty companies have remained stable. Several indicators also show that the government's exposure to AIG has continued to decline with the execution of AIG's recapitalization in January 2011, but the return to the government on its investment continues to depend on AIG's long-term health, market conditions, and timing of Treasury's exit. With the recapitalization, AIG paid the Federal Reserve Bank of New York (FRBNY) about $21 billion to completely repay its debt to the FRBNY revolving credit facility. Treasury also exchanged its Series C, Series E, and Series F preferred stocks for approximately 1.655 billion shares of AIG common stock that have a cost basis of about $49.148 billion. Consequently, the government's remaining $85 billion in assistance to AIG is composed of balances owed by Maiden Lanes II and III to FRBNY and Treasury's common stock in AIG and preferred interests in AIA Group Limited. As of March 31, 2011, the amount of assistance available to AIG also has been reduced to $123.9 billion. As Treasury sells its stock in AIG to exit the company, several indicators show that the most likely investors will be institutions, many of whom already have holdings in insurance companies. Several indicators show that AIGFP has continued to unwind its credit default swap (CDS) positions and its portfolio of super senior CDS. AIGFP has decreased its number of outstanding trade positions and its number of employees, and AIG has reported that it wants to complete the active unwind of AIGFP's portfolios by June 30, 2011. Also, AIGFP continues to see overall declines in its super senior CDS portfolio, including regulatory capital, multisector collateralized debt obligations, corporate collateralized loan obligations, and mezzanine tranches (the riskiest portions of related securities that are issued together). The government's ability to fully recoup its exposure to AIG continues to be determined by the long-term health of AIG; changes in market conditions; and how Treasury balances its interest in selling its shares in AIG as soon as practicable while striving to maximize taxpayers' return. GAO will continue to monitor these issues in its future work.

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