Timothy G. Massad
Note: This blog and infographic have been updated to reflect Treasury's announcement today that it expects to receive an additional $2.7 billion from its underwritten public offering of American International Group, Inc. (AIG) common stock, increasing Treasury's expected proceeds from the public offering to approximately $20.7 billion.
During the financial crisis, the Treasury Department and the Federal Reserve committed a combined total of $182 billion to stabilize AIG. That assistance was a critical part of a broad-based effort to break the back of an historic financial panic and prevent a second Great Depression.
Treasury's offering this week of $20.7 billion in AIG common stock is an important milestone. That is because not only was the objective of stopping a financial panic accomplished, but the expected proceeds of this offering will mean that the overall $182 billion commitment made to stabilize AIG is fully recovered.
That is a credit not only to the overall strategy and the work of many people across both Democratic and Republican administrations and at the Federal Reserve, but also to the efforts of AIG under its new leadership to restructure the company and pay back the taxpayer.
In fact, with this sale, Treasury and the Federal Reserve have already realized a combined $15.1 billion positive return. And the sale of Treasury's remaining 234.2 million common stock shares will provide an additional return for taxpayers.
Both Treasury and the Federal Reserve provide separate accountings of their individual AIG-related commitments. But many people are interested in seeing a broader picture of the current status of that assistance. As such, we compiled the following overview of the combined Federal Reserve assistance and Treasury investments.
Indeed, when conducting a January 2010 review of the special purpose vehicle established by the Federal Reserve to purchase mortgage-related assets from AIG's counterparties ("Maiden Lane III"), the Special Inspector General for TARP (SIGTARP) wrote that "any assessment of the costs of these decisions to the Government and the taxpayer necessarily must . . . take into account both the funds that [the Federal Reserve Bank of New York] previously loaned to AIG and the subsequent TARP investments.
We still have more work ahead to wind down Treasury's remaining AIG common stock holdings and recover additional taxpayer dollars. And the total amount of proceeds that we realize from those future sales will depend upon market conditions. But it's certainly welcome news today that the overall $182 commitment to stabilize AIG during the financial crisis has been fully recovered.
Of course, committing $182 billion to stabilize AIG was something that the government should never have had to do. As Secretary Geithner stated in January 2010:
Many Americans look at what happened with AIG, and the rest of the financial rescue, and simply ask: Why was it necessary? Why was it fair for the government to take taxpayer money and put it into an institution that had mismanaged itself to the edge of collapse? The answer is that it was not fair, and it was not something our government should ever have to do. But those Americans, those families and business owners who played by the rules and played no role in giving rise to this recession, should understand that if the government had failed to act, that failure would have unleashed substantially greater damage upon them.
In confronting this crisis, we learned from the past. Now we must learn from more recent failures, especially those that required AIG's rescue. If we had stronger supervision and regulation in place, the government could have acted sooner to avert the crisis. If we had better crisis management tools in place, the government would have had better options. If we could have done it any differently, we would have done it differently. Instead, we had no other choice. That is the basic lesson of this great recession.
That's why, as Secretary Geithner noted yesterday: "To stabilize and then restructure the company with a very substantial positive gain for the American taxpayer is a significant accomplishment, but we need to continue the critical task of implementing Wall Street reform so that the American economy is never put in this position again."
Timothy G. Massad is Assistant Secretary for Financial Stability at the U.S. Department of the Treasury
The Federal Reserve Bank of New York established its AIG credit facility in September 2008 before TARP was passed – and, in partial consideration, AIG agreed to issue an equity interest in the company to a separate trust, managed by independent trustees, for the benefit of the U.S. Treasury. Then, in November 2008, Treasury purchased preferred stock in AIG with TARP funds – the proceeds from which were used to refinance a portion of the FRBNY credit facility and strengthen AIG's capital structure. Additionally, the TARP preferred stock Treasury purchased in November 2008 was subsequently converted to common stock as part of a broader recapitalization plan that was completed in January 2011 among Treasury, the Federal Reserve, the independent trustees for the AIG trust, and AIG. See the timeline below for further details.