Troubled Asset Relief Program:
Third Quarter 2010 Update of Government Assistance Provided to AIG and Description of Recent Execution of Recapitalization Plan
GAO-11-46, Jan 20, 2011
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) represents one of the federal government's largest investments in a private-sector institution since the financial crisis began in 2008. AIG is a holding company that, through its subsidiaries, engaged in a broad range of insurance and insurancerelated 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 April 2010. Specifically, GAO discusses (1) trends in AIG's financial condition, (2) trends in the unwinding of AIG Financial Products (AIGFP) and the financial condition of AIG's insurance companies, and (3) the status of the government's exposure to AIG. To update the indicators, GAO primarily used available public filings as of September 30, 2010, 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 has generally remained relatively stable or showed signs of improvement since GAO's last report in April 2010. As of September 30, 2010, the outstanding balance of the Federal Reserve and Treasury assistance to AIG was $123.7 billion, down from $129.1 billion in December 2009. Overall, federal assistance appears to be facilitating a more orderly restructuring of the company. Several indicators show that AIGFP has continued to unwind its credit default swap positions and its portfolio of super senior credit default swaps. Several indicators on the status of AIG's insurance companies illustrate that its insurance operations are showing signs of recovery, but federal assistance has been a critical factor. In particular, in the first three quarters of 2010, additions to AIG life and retirement policyholder contract deposits exceeded withdrawals and the companies' pretax operating incomes, which increased slightly in 2009 remained positive. AIG's property/casualty companies have remained stabilized. AIG repaid some of its debt to the federal government, but a larger volume of activity involved exchanging AIG's debt on the revolving credit facility (facility) with the Federal Reserve Bank of New York (FRBNY) for federally owned preferred interests in AIG ($40 billion) and AIA Group Limited (AlA) and American Life Insurance Company (ALICO) special purpose vehicles (SPV) ($25 billion). As a result of this shift from debt to equity, which has occurred gradually, the authorized amount of the facility has decreased and the amount of preferred equity interests held in AIG and various SPVs for the government has increased. For example, as of September 30, 2010, the amount of assistance available to AIG through the facility had been reduced to $29.2 billion and the amount AIG owed the facility was reduced to $20.5 billion. Also, FRBNY'S preferred interests in the SPVs created to hold the shares of certain foreign life insurance companies--AIA and ALICO--have increased nearly $1 billion and the Series F stock held by Treasury has increased more than $2 billion since December 31, 2009. Upon the execution of the recapitalization plan on January 14, 2011, all of the government's assistance to AIG is now in the form of common stock and preferred interests. Consequently, 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 sustainability of any positive trends in AIG's operations depends on how well AIG manages its business, and 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. GAO will continue to monitor these issues in its future work.