Today’s AIG announcement has generated some surprisingly naive headlines. The company may have announced U.S. bailout exit plan, but that does not make it so. (Citi’s numbers don’t look any better).

Let’s take a closer look at the numbers and separate the facts from fiction:

Total Bailout: $182.3 billion dollars

Amount Still Owed:  $132.1 billion (as of June 30, 2010)

Shares Outstanding: ~700 million

Current price:  $39.10 (+$1.65)

Market Capitalization:  ~$27 billion dollars

Today’s transaction was the converting of Preferred  Stock that had a nominal value of $49.1billion — but this was privately held stock that did not trade. Its true value is actually unknown.

For valuation purposes, let’s imagine a hypothetical company that has myriad valuable parts worth about $30 billion dollars.  But the company also owes over $130 billion dollars to creditors. We would describe that firm as insolvent, and heading towards bankruptcy.

Yet that is not how people think of AIG. The wisdom of crowds seems to think that the government is going to keep a firm bid under the stock price. This same crowd also thinks share dilution is positive, and ran the stock up almost $5 dollars 5% on the news of another 12% dilution.

Management is selling off pieces of the company to repay the government. How they are going to find another $132 billion in value has not been remotely explained.

Converting Preferred to Common stock does reduce the massive AIG obligations any more than converting a 20 into 2 tens makes you any wealthier . . .

This is little more than a shell game

Category: Bailouts, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

36 Responses to “AIG Repaying Uncle Sam? Not By a Long Shot”

  1. doug says:

    can’t wait to yell the truth at NBR tonight.Thanks Barry for making this simple to understand.

  2. Mannwich says:

    Yet the idiots on Bloomie TV were practically doing a touchdown dance earlier today and claiming AIG’s Benmosche leading them to the “biggest turnaround in history”. I’m not kidding. Nevermind the BIG assist from Uncle Sam. We’ll just ignore that little footnote, shall we? Ridiculous.

  3. KidDynamite says:

    barry – where did you get your numbers? according to AIG’s release today ( , AIG says they owe:

    1) $20B on the FRBNY credit line
    2) $26B in preferreds of AIG/ALICO to the Fed
    3) $49B to the Treasury (preferreds)

    how did you get $132.1B?

    also, note that the implied market cap of AIG is much much larger than $27B. I don’t understand how the stock doesn’t trade down on an announcement of $49B of dilution – that was expected? Fine – then you can do the spreadsheet math and calculate that the implied mkt cap of AIG post conversion is well above $60B (there’s still a little uncertainty as to the actual details)

    I just don’t get it. But can you explain your $132.1B number anyway? I’m assuming you’re counting the money we gave them in exchange for the 80% warrants? that must be it – how much was that?… oh – that’s another oddity – the 92.1% gov’t ownership (cited in AIG’s release) doesn’t really jive with the math – it should be even higher! I”ll try to explain that one later after I flesh it out some more.

  4. Andy T says:

    Yeah, that headlines contradict a pretty bold assertion made a year ago….

    I guess they’ve still got another 89 years to pay it back this century, though…..

    My comment at the time:

    “Andy T Says:
    August 20th, 2009 at 8:44 pm
    Actually, this gentleman (Benmosche) is saying a lot of reasonable things. I mean, heh, if I had just been given a 180bn loan/backstop from Uncle Sam, why be in a hurry to fire sale shit? If you have a 25-40 year time horizon, then they are much better off not selling any of their profitable units. Eventually inflation will take hold in several years. By 20-30 years from now, 180 bones won’t seem like such a big hurdle….

    In fact, I’ll make a sidebet with Barry Ritholtz that neither of us will be able to collect:

    AIG, if allowed to continue to operate, will be able to pay back the 180 billion in the next 30 years.

    Now, I’m just completely ignoring all the moral hazard implications here. Nobody get’s a lifeline in AT’s libertarian world. Just let it get vaporized. But, if you’re going to toss 180bn at the business, you might as well run it the best you can for the long run.”

  5. Andy T says:


    Don’t argue with “the Barry”….

    He’s smarter than you and he knows it. If you keep this up, you’ll be jeered by the BR Acolytes and tossed out out the door.

  6. The bailout was $182.3b. They paid back $49b.The balance ($131b) is what is left.

    And I like when people use intelligent arguments to disagree with me. Like Kid D: Good data persuasively presented. It is a valuable contribution to both myself and readers.

    The pointless obnoxious stuff (cough cough) that does not add to the discussion is an annoyance to readers. I try to encourage smart discussion — especially amongst the pros in the crowd. The silly stuff gets in the way of that.

  7. KidDynamite says:

    actually Andy, this time it definitely wasn’t my intention to argue with Barry – this AIG story is a disgusting shell game designed to fool the American people, and the details are murky even for those who are following it.

    like me, for example. I wrote a whole post about it this morning, but I totally forgot that we got that 80% warrant stake for giving AIG a crapton of money…

    There’s something really weird about the 92.1% ownership stake being cited by the press… If you take the 80% current stake, then take the $49B conversion, you end up with more than 92%…

  8. Andy T says:

    To me the whole thing smacks of politics. It’s a “win” to show that AIG is “paying back” the USG right before the Elections…”See, everything is ok!”

    IMO, they shouldn’t mess around with any of this at this time–it’s waaaay too early in the recovery process. We crossed the rubicon with the 182-bone backstop. At this point, might as well let them just run the business as well as they can and just sell off assets as good bids step up over time.

  9. obsvr-1 says:

    AIG, U.S. agree on plan to pay back taxpayers

    Why in the hell should Treasury exchange higher in the capital structure Preferred shares for inferior common shares. This is complete BS, AIG (and any other bailed out company) should be responsible for paying back the debt via asset sales and/or cash flow from operations, not transferring the liability to another party via common share conversion and offerings. Similarly, the Citi conversion and the GM IPO is using the same BS maneuver — why should the taxpayer give up its superior position for distress priced common shares and market risk for rising valuation ?!!??!!?

    Taxpayer funds were used to bail out these companies, the taxpayer should not be forced into accepting the lowest position in the capital structure for do it — to the contrary, taxpayer funded investment should have been at senior secured debt position (like the FED (FRBNY) capital infusion).

    While holding the preferred shares, AIG is responsible for paying dividends and for coming up with capital to repurchase the preferred shares. By converting to common, the treasury loses the quarterly dividend payments and the guaranteed repayment of the principle (provided the company remains viable and can repay — but isn’t that is what the are telling us, “we have shed the problem child, AIG-FP, we have a strong insurance business, and believe the gov’t will profit from their investment”.

    By converting the preferred to common, AIG is moving the bailout liability to the market (new suckers – er — investors); essentially moving the liability from direct taxpayer funding to indirect taxpayer funding through mutual funds, pension funds and retail as those investors are still taxpayers.

    Other than for political reasons, there is no reason for the Treasury to act hastily in the exit strategy. If it is going to take time for AIG to recover and grow then holding the preferred position with dividends is the best position to maintain as good stewardship of taxpayer funds. If AIG wants to do a common stock offering such that the use of proceeds is to redeem some or all of the preferred shares, then fine go ahead and do that, let AIG take the risk of market acceptance, valuation and the time it takes to reach a valuation to redeem the preferred shares.

    A good test for the Treasury would be to ask Warren Buffet (if he held the same position) if he would exchange his preferred position for common shares. I am sure he would not, and even if somehow he saw an upside and felt that it is a good investment decision he would certainly ask for a premium to convert.

  10. obsvr-1 says:

    @KidDynamite Says:
    September 30th, 2010 at 5:27 pm

    barry – where did you get your numbers? according to AIG’s release today ( , AIG says they owe:

    1) $20B on the FRBNY credit line
    2) $26B in preferreds of AIG/ALICO to the Fed
    3) $49B to the Treasury (preferreds)

    how did you get $132.1B?

    —- Reply

    The congressional oversight panel (COP) released a report on 6/10/2010 with all the gory details of the AIG TARP/bailout.

    It is a long and detailed report, page 14 is the table that supports the 132B number; i am sure there have been adjustments to this since June, would need to investigate further.

    It is sickening to see the constant adjusting of the Preferred position to the favor of AIG and the interest rate reductions for the FED (FRBNY) loans.

    Also included is the evidence of the backdoor bailout to the counter-parties involved with AIG (read: banksters) The oversight panel had harsh things to say about Geithner and the FED throughout the report.


    BR: Go here:

    It shows the total invested, lent and guaranteed to AIG — and what is still owed Page 9 — $132.4B

  11. NewBob88 says:

    Why haven’t all the common stockholders been eliminated, zero out, wiped out?

  12. dmlopr says:


    AIG total Commintted Invested
    $182 billion $127.4 billion

  13. KidDynamite says:

    I would LOVE an answer to NewBob88′s question… in fact, it’s much worse than that. they were given MORE warrants today. WHY?!?!?! BLATANT attempt to continue the shell game – after all, we want AIG’s stock price as high as possible when the gov’t sells its stake. But notice – giving warrants to the common shareholders doesn’t increase the value of the company, of course!

  14. obsvr-1 says:

    @NewBob88 Says:

    Why haven’t all the common stockholders been eliminated, zero out, wiped out?

    — Reply

    They should have, along with haircuts to the bondholders. AIG was recapitalized without going through a restructuring of the debt and equity holders. They were spared for political (AIG was not nationalized) and ‘good ole boys’ capital preservation. You would have to dig in (if possible) to find out who were the major bond and stock holders are (were) that received the preferential treatment. If the YHOO major stock holder page is accurate you can see the major stockholders (Who is FAIRHOLM Capital Management & FAIRHOLM FUND — according to YHOO they own 45% of AIG common).

    This is why it keeps on stinkin’

  15. westy says:

    I never comment on these blogs, but saw Barry on CNBC and just had to disagree with his analysis, which is fairly far off – I don’t think we get all our money back, but probably far more than he believes. Right now, Uncle Sam is owed 130mm bucks, as of June. Most of that is in the forms of loans and preferred listed on AIG’s balance sheet as a liability. Thus, any common equity value that is currently exists in the marketplace (assuming the stock market is not far off, but I don’t know AIG well so I can’t comment) is already reduced in value by the value of the stated liabilities. Thus, when Barry uses $30bb as a value of AIG, he is referring to the common equity value: the Total Enterprise Value, (e.g the common, preferred and debt) is substantially higher. What the market is telling you, is that all the liabilities owed by AIG further up the capital structure are money good (again, the market could be overvaluing AIG). If you assume the US gets paid back all the stated liabilities and include the $20 bb in common equity the US owns, there’s a good chance we see the vast majority of the money back.

    Put another way: if the Common is worth $27bb and the US converts $50bb of pfd to common, now the common should be worth $87bb


    BR Lol, its like Magic!

    You just created $50 billion out of thin air — you must work for the Fed !

  16. lalaland says:

    So why does the financial press – not exactly warm to the administration – present it so stupidly? Does the glorification of CEO’s trump embarrassing the administration? I wager CNBC and others were parroting the same line; even the WSJ danced around the issue and never came out strong.

    You would think they would have a field day with the idea of the Obama administration trying to sweep the bugs under the rug right before election but I heard Bloomberg too, and they were talking about Benmosche like he was a minor hero; they clearly bought it hook, line, and sinker from him at least. I don’t get it.

  17. obsvr-1 says:

    FAIRHOLM — looks like they may have came in after the collapse, distressed asset purchase betting on the recovery, buying 24% of the outstanding common – pretty risky bet. And 38% of bonds and other debt, wonder when they became bondholders ?


    Fairholme Capital Management Issues Statement on AIG Announcement

    MIAMI–(BUSINESS WIRE)–Fairholme Capital Management today issued the following statement:

    On behalf of our approximate 440,000 shareholders and clients, Fairholme owns approximately 24% of the outstanding common stock, 38% of the mandatory convertible bonds and other debt instruments of American International Group, Inc. (AIG).

    Fairholme invested over $1.8 billion in AIG securities, more than 10% of assets under management, with the knowledge that for decades AIG was the premiere insurer – a shining example of how the United States can compete around the world. We also invested in AIG with the belief that such a past is not easily destroyed.

    Nevertheless, all of us at Fairholme applaud and appreciate the yeomen’s work of AIG’s management and board of directors, the United States Treasury, the Federal Reserve System and its trustees and countless others involved in this most complex process.

    We strongly support the proposed solution to revitalize AIG in a fair and equitable manner for all constituents, foremost our country’s taxpayers, and look forward to a vibrant future for AIG and the U.S. economy.

    Information about Fairholme Capital Management and Fairholme Funds, Inc.

    Fairholme Capital Management, L.L.C. is registered with the SEC as an investment adviser and, as of September 30, 2010, has approximately $18 billion of assets under management. Fairholme Capital Management is the investment manager of each of The Fairholme Fund and The Fairholme Focused Income Fund. Operating and investment decisions for Fairholme Capital Management and the Funds are made by Bruce R. Berkowitz, in consultation with Charles M. Fernandez. Mr. Berkowitz is the founder and Managing Member of Fairholme Capital Management and the President and a Director of Fairholme Funds, Inc. Mr. Charles M. Fernandez is the President of Fairholme Capital Management and the Vice-President and a Director of Fairholme Funds, Inc.

    The Funds’ investment objectives, risks, charges, and expenses should be considered carefully before investing. The prospectus contains this and other important information about the Funds, and may be obtained by calling shareholder services at 866-202-2263 or visiting our website at Read it carefully before investing.

  18. westy says:

    Barry, if you don’t understand the concept of Total Enterprise Value, I suggest you’re missing something they teach in Business 101.

  19. KidDynamite says:

    AIG has their own chart on their website, for those interested:

  20. AHodge says:

    but give sleazebag geithner credit for good spinning
    ireland just did the same common for preferred yest and got slammed in the markets?

  21. AHodge says:

    its just one more step on the way to complete bailout. cost free? what BS?
    you note this citi etc all coming out at election time. mission accomplished!

  22. AHodge says:

    and dont forget the AIG reverse split? at 20/1? those shares they get not at $40 but $2 in real earlier share of company values?

  23. AHodge says:

    so its worse than your two 10′s for a 20?
    quick quick give me 2 20′s for 2?

  24. ben22 says:

    thanks for this information, valuable.

  25. [...] Barry Ritholtz says AIG isn’t paying back its bailout, not by a long shot. [...]

  26. [...] situation at AIG (AIG) just doesn’t add up.  (Big Picture, Deal Journal, Felix [...]

  27. JayHank says:

    Barry, I love your blog but you’ve simply not done your homework on this and are repeating misinformation.

    The $182.3 billion includes credit lines that were never drawn in full. This is like saying someone who has a $10,000 credit line from American Express owes $10,000, even if they only ever borrowed $5,000. AIG never pulled the full draw from AIG and Treasury — verify this on the Fed’s H41 or on the Treasury’s financial stability reports.

    The $182.3 billion includes lines that were never drawn and it includes $52.5 billion that the Fed used to create Maiden Lane II and Maiden Lane III. Let’s talk numbers, Barry, not right or wrong. Maiden Lane II and III were funded with $52.5 billion in loans and they assumed assets (mbs, swaps, abs, etc.) that are currently IN THE MONEY. Look at the books — a portion are junk, but this portfolio is going to finish in the black.

    After that, the Fed owes:

    1) $19B on the FRBNY credit line
    2) $26B in preferreds of AIG/ALICO to the Fed
    3) $49B to the Treasury (preferreds)

    AIG is going to sell ALICO for $15.5 billion. That’s already in the pipes. AIA is roughly double ALICO’s size. Once those two assets are sold, that retires the $45 billion or so they owe the Federal Reserve. (AIG has also just agreed to sell AIG Star and AIG Edison for $4.8 billion.)

    The only thing that then remains is the preferreds that Treasury has in AIG. With their ongoing operations they need to come up with $49 billion in value NOT $132 billion. You’re off by $83 billion on how much of this is mystery, Barry. If I posted an analysis on housing that was off by $80 billion, you would ream me.

    How do they generate value? Even after all that, they still entirely own Chartis and SunAmerica, two absolute giants in the industry. SunAmerica and Chartis have earnings of about $1 billion a quarter EACH. Add in the other straggling pieces of the AIG empire, the airplane leasing division, etc. and you no longer need crazy assumptions to see how they might pay this back. It’s definitely not a sure thing, but it’s not insane to think $30 a share is a reasonable price.

  28. I am referring to the full AIG Bailout, not just the first round ($85 billion to AIG, for a 79.9% equity stake in the insurer in the form of warrants).

    The original bailout included about $50B+ to counter-parties that was paid out. That is gone. Of what AIG has paid back, they have yet to even cover that initial pass thru payment to GS, SocGen, etc. Nothing beyond that has been covered yet.

    I will get my AIG file out and look at the original and updated numbers

  29. try this for starters:

    click on the image, go to page 9

  30. AHodge says:

    re this early exchange
    Put another way: if the Common is worth $27bb and the US converts $50bb of pfd to common, now the common should be worth $87bb

    BR Lol, its like Magic!

    You just created $50 billion out of thin air — you must work for the Fed?

    not following that closely but if Westy right per above
    that $27 bio vs $50 bio extinguishment of preferred?
    then they may actually be fully applying this scam conversion off the old pre 20/1 reverse split i noted above?
    while you may think the rest of this is criminal, that would be a prosecution layup,
    assuming they understand accounting.

  31. JayHank says:

    Barry, the very information you provided displays the value of the Maiden Lane II and III portfolio holdings. They’re currently marked at levels that can retire the entire $52.5b credit that was used to establish them. Maiden Lane II has $15.9b in assets to pay off $14.5b in remaining debt. Maiden Lane III has $23b in assets to pay off the remaining $16 in debt. The Maiden Lanes weren’t $52.5 billion in payments to counterparties for bupkis as you seem to believe. Instead, they were payments to assume a large portfolio of financial assets.

    That reduces the bailout to the $49b from Treasury, the $26b from the Fed (which has since been paid down to about $19b) and the $25b under the Fed’s ALICO and AIA arrangement. But AIA and ALICO and AIG Star and AIG Edison look like they’re going to sell for enough to retire the remainder of the debt to the Fed.

    That reduces the bailout to only the $49b from Treasury. So that’s $49b against 92 percent of a company that has perhaps $8b a year in earnings.

    Tell me where any number or fact above is wrong.

  32. All I can tell from that journal is that there is $132.395 billion dollars that is still owed.

    If merely liquidating was the answer, if it were that simple, why don’t they merely sell the holdings and get the Feds out of their hair?

    Maybe that’s because:

    a) the holdings are not worth what they are marked;
    b) they are terribly illiquid;
    c) there are not many (if any) buyers for this paper.

    As my head trader used to tell the guys loaded up with illiquid paper, “Good luck hitting that bid.”

  33. obsvr-1 says:

    @JayHank Says:
    … That reduces the bailout to only the $49b from Treasury. So that’s $49b against 92 percent of a company that has perhaps $8b a year in earnings.

    – Reply

    The asset sells are intended to pay off the FRBNY and as you state may just well bring in enough funds to pay off that loan and preferred shares. But a big point of concern/frustration is the Treasury’s continuous restructuring of the Taxpayer funded bailout to terms more favorable to AIG

    11/25/08 UST purchased 40B of Series D preferred 10% annual, quarterly dividend cumulative; warrants 10 year life for 2% of AIG common (preferred convertible to 77.9% of AIG common

    4/17/2009 UST Exchanges Series E for Series D 10% Dividend NON CUMULATIVE (dufus geithner)
    Accumulated and unpaid dividend (1.6B) paid on exchange … THERE GOES THE DIVIDEND

    AT this point UST owns 79.9 % of AIG

    4/17/2009 UST also purchase up to 29.8B of Series F preferred 10% NON CUMULATIVE and warrants (not sure what the warrants look like on this deal, not in the table) — To date AIG has drawn 7.544B on the Series F credit line.

    1 — Has AIG been paying the 10% dividend on the on the preferred shares —- answer NO; They didn’t pay the dividends on the Series D when they were outstanding and cumulative (1.6B) which AIG still owes — so I am sure they have not, are not, and will not pay dividends on the Series E and F. Dividends on 49.9B should be paying UST 5B / year

    2. It is unconscionable that UST is now considering exchanging the preferred for Common.

    If AIG is so healthy that they have 8B in earnings, then use those earnings to 1) pay the quarterly dividend on the preferred and 2) redeem the preferred shares.

    Once they have done that the UST will be out of the picture and then AIG is free to issue new shares to the market or whatever the hell they want to do with there leaner, meaner no gov’t hangover company.

    BUT DO NOT make the taxpayer convert to common equity and take the market risk and lose the dividend.

    Every time I dig back into the AIG bailout it stinks worse !!!

  34. JayHank says:

    I’m suggesting a fourth option:

    d) they ARE liquidating the holdings and all available evidence copiously supports this.

    The information you yourself provided shows this. Maiden Lane II has been about 36 percent liquidated (from $22.5b to $14.5b) and Maiden Lane III is 46 percent liquidated (from $30b to $16.2b). AIG is also selling off AIA, ALICO, AIG Star and AIG Edison, aka liquidating them. And that still leaves AIG with SunAmerica and Chartis.

    You’re instincts are right to be outraged. They’re only able to liquidate the position over the course of years because of their government funding. But, given the stability of that funding, they are rationally pursuing a strategy of gradual liquidation that no non-bailed out institution would have (it would be foolish with stable long-term funding to liquidate $50 billion of assets in a fire sale). Barry, you’re ABSOLUTELY right about the moral hazard here, you’re just wrong about the actual position AIG is in.

    (I did my homework on this stock when it was at $13 and saw that a huge amount of investors were substantially confused about the status of these bailouts/didn’t understand that the Maiden Lanes had substantial assets. I got out a year later around $34 which shows I’m no market genius since I missed an earlier peak and the stock has run up another 10 percent since then.)

  35. JayHank says:

    @obsvr-1 Says

    Yep, absolutely right. The bailout absolutely stinks. I totally totally agree. By not being required to pay the Treasury dividends, AIG was given the equivalent of a $49 billion zero-interest loan. Nobody else is able to get that sort of funding. That’s exactly the reason they’re not liquidating in a fire sale because they have this sort of unnatural funding structure.

    If you think I’m defending the bailout as justified, you are mistaken. I’m talking about the math of whether or not they can pay it back. So I repeat you are Absolutely Right about the moral hazard. But if the questions are 1) is AIG stock reasonably priced? or 2) is AIG close to being able to exit the bailouts as Geithner claims then the answers are 1) probably not far off and 2) yes, they are. If the question is 3) was any of this fair? Nope, not for a minute. You are right about that third question. But Barry and others are so mad about question 3 that they’re not doing their homework on 1 and 2.

  36. obsvr-1 says:

    So … when the bailout first began the reason the gov’t stake in AIG was set at 79.9% is explained by Ezra Klein (below). If this is true then why does it make sense NOW that the gov’t can take a 92.1% ownership positoin and not have to comply with the “consolidate AIGs debt on the gov’ts balance sheet ?? They either lied then or they are lying now (oops this is the gov’t where the truth rarely emerges).



    79.9% ?? As a human being with an instinctive fondness for round numbers, I was a bit puzzled by the government’s purchase of a 79.9% equity stake in AIG. But Steven Davidoff explains the situation: “The government purchases 79.9 percent of the company in question. It can’t be more than that, because if it goes over the magical number of 80 percent, the company’s debts are then required to be consolidated onto the federal government’s balance sheet. Keeping it at 79.9 percent allows the government to maintain the fiction that it is still not responsible for the company’s solvency.”

    Additionally, what the government bought was, in essence, stock-once-removed. They got warrants that can become stock. This preserves the fiction that they don’t own AIG, though the difference here is is the difference between me buying your house and moving into it and me buying your house and letting you live there until I change my mind.

    Posted by Ezra Klein on September 17, 2008 12:00 PM | Permalink