AIG Dips Into Bailout Fund Again, This Time to Repay New York Fed

By Matt Cover | November 3, 2010 | 5:00 AM EDT

A view of the U.S. Treasury Department in Washington. (AP File Photo/Evan Vucci)

( – Bailed-out insurance giant AIG will get another $22 billion in federal taxpayer funds through the Troubled Asset Relief Program (TARP) so it can pay back some of the other bailout funds it received from the Federal Reserve Bank of New York (FRBNY).

The U.S. Treasury Department announced the newest AIG bailout on Monday, saying it was part of a restructuring of the government-owned insurance company.

Treasury also announced that AIG had successfully sold two of its subsidiaries – American Life Insurance Company (ALICO) and AIA Group Ltd. – and that proceeds from those sales would go to repay other New York Fed bailout loans.

Technically, the $36.7 billion AIG made from selling ALICO and AIA will go to repay a Federal Reserve Bank of New York credit facility established to help AIG in the aftermath of the 2008 financial crisis. AIG owes that credit facility $19.2 billion plus interest.

The $22 billion in additional TARP money will go towards purchasing the Federal Reserve Bank’s equity stakes in AIA and ALICO, which will then be transferred to the Treasury Department.

Essentially, the government is using one pot of borrowed money, TARP, to pay back another pot of borrowed money: the FRBNY loans to AIG. This move allows the New York Fed to reduce its stake in AIG, leaving only two special purpose vehicles – worth a combined $27.8 billion in FRBNY loans– that AIG needs to repay.

The transfer to Treasury of assets formerly held by the Federal Reserve Bank of New York means that the federal government now owns 92.1 percent of AIG.

The Treasury Department said that based on current market valuation of the few publicly available shares of AIG, it should end up making a profit on the defunct insurance giant when it eventually offers its approximately 1.66 billion shares of stock for sale.

“After the restructuring, the Treasury Department will own 92.1 percent of AIG, which equates to approximately 1.66 billion shares of common stock in the company,” the department said in a statement on Monday.

“Based on the market closing price of AIG on Oct. 29, 2010, these shares are worth approximately $69.5 billion,” said the statement.  “This amount significantly exceeds Treasury's current $47.5 billion cash investment in AIG.”

New $20 currency notes roll off the presses at the Bureau of Engraving and Printing in Washington. (AP File Photo/J. Scott Applewhite)

The Treasury Department also said it expects to make a profit on the two FRBNY-funded special purpose vehicles that contain AIG’s once-worthless mortgage investments. Based on current market values, the Treasury Department fully expects to recoup all of the public’s bailout costs.

“Based on current market prices and the value of the assets supporting the FRBNY's loans to and preferred interests in AIG and Maiden Lane II and III [the FRBNY investment vehicles], the USG expects to earn a profit on its loans to and investments in AIG,” the Treasury statement said.

This means that the Treasury Department expects to repay the Maiden Lane II and III loans when it eventually sells the mortgage-backed securities contained in the vehicles.