AIG Posts First Profit in Three Quarters on Asset Sales

During the fourth quarter AIG (American International Group) posted its first profit in three quarters. The corporation posted $11.2 billion profit, compared with an $8.87 billion loss a year ago. Glad to see they are recovering, now about that bailout money….

Business Week reports:

Chief Executive Officer Robert Benmosche, 66, raised almost $37 billion last year selling American Life Insurance Co. to MetLife Inc. and divesting a majority stake in AIA Group Ltd. in a public offering. Benmosche is adding to reserves, hiring risk managers, and settling lawsuits and regulatory probes as he prepares the company for private ownership. The U.S. Treasury Department accumulated 92 percent of AIG’s stock and plans to divest its holdings.

“Some of the transactions resulted in larger gains than expected,” said Jonathan Hatcher, a Jefferies Group Inc. analyst in New York. The gains boosted capital and should make the company “feel a little bit more comfortable with the reserve additions that they needed.”

Shareholders’ equity, a measure of assets minus liabilities, rose to $85.3 billion from $80.8 billion on Sept. 30. The insurer booked $17.6 billion of gains on asset sales, including AIA and Alico.

Continue reading at BusinessWeek.com...

Treasury's Shock and Awe on AIG

According to CNN, the Treasury and Federal Reserve finalized details of the latest restructuring of the financial giant yesterday. The agreement will allow AIG to borrow funds from the Treasury to repay the federal government. This will leave the Treasury a 92% stake in the company.

"Today's announcement is a milestone in the government's long-stated efforts to exit our investments in private companies as soon as practical while protecting taxpayers," the government said. "When all is said and done, we believe taxpayers will recover every dollar invested in AIG and stand a good chance of making a profit."

That's a large chunk of stock, and the government – which is not exactly eager to be seen in the bailout business nowadays, what with all the associated bad press – would surely like to sell it sooner rather than later so it can advertise all the profits its so-called investments are making for taxpayers. This has worked wonders lately with two other bailed-out outfits, Citi (C) and GM (GM).

Thus, the Wall Street Journal reports the government wants to sell a quarter of its stake -- $15 billion worth -- in a series of deals that would ideally start early in 2011.

Continue reading at CNN.com...

AIG payback plan back to square one

AIG and Prudential were going to buy an Asian life insurance company, AIA, for an agreed upon $35.5 billion price tag that was projected to have accelerated AIG’s bailout repayment to the government. Instead, Prudential PLC, not to be confused with the American Insurer Prudential Financial Inc., has been trying to renegotiate the terms of the deal with AIG, offering $30.375 billion instead.

AIG has said that it considers the sale of AIA to be a crucial component of its effort to repay the more than $130 billion it has borrowed from U.S. taxpayers. AIA had planned on using the proceeds of the sale to pay down $25 billion of their own debt to the Federal Reserve.

Now that the deal has fallen through, AIG may consider an initial public offering for AIA.
According to a regulatory filing, AIG will receive a termination fee from Prudential worth $223.9 million on July 1.

Read the full article here.

Geithner Says A.I.G. Rescue Prevented a Depression

Treasury Secretary Timothy Geithner spent several hours being questioned this morning, on the government’s actions during and after the bail out of American International Group (AIG). Geithner said that the decision prevented another great depression and – despite what it looked like – was made to protect the American people.

According to a New York Times story, the committee did not seem impressed with his answers and spent a decent amount of time questioning the Treasury Secretary. You can read a segment of the piece below.

Mr. Geithner said he was not involved in the decision to withhold information about deals that sent billions of taxpayer dollars from the bailout of A.I.G., the insurance giant, to big banks.

“I withdrew from monetary policy decisions,” Mr. Geithner said, “and day-to-day management of the New York Fed.”

The committee called Mr. Geithner, former Treasury Secretary Henry M. Paulson Jr. and other officials to explain, once again, the confounding results of an $85 billion rescue loan made to A.I.G. in September 2008. The loan sheltered big banks from any losses, but saddled A.I.G. with a debt so crushing that the Treasury soon had to step in and provide even more rescue money. Mr. Geithner was the president of the Federal Reserve Bank of New York in September 2008, when the first rescue loan to A.I.G. was extended.

After Mr. Geithner’s statement, the questions focused almost immediately on trying to determine why those negotiating on behalf of the taxpayers did not push the banks to make concessions, like returning the collateral to A.I.G. or accepting less than full value for their contracts with the insurer.

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The 10 Biggest Recipients of Federal Bailout Money

Over the past year, the federal government has given out a lot of money to both struggling financial companies and American automobile makers. With huge executive bonuses in the news and more money being given out to huge corporations, the American taxpayers are beginning to become more skeptical of federal bailouts. To help the readers of my blog gain a better understanding of these “bailouts” I have put together the following list of the top 10 biggest recipients of federal bailout money.

#1 AIG

$170 to $240 billion

The American International Group (AIG) makes the top of my list because the insurance giant has received numerous bailouts, which many experts claim totals over $170,000,000,000. In addition, it is predicted that AIG could need as much as $75 billion more in federal funds over the next few years. This could put their total at upwards of a quarter of a billion dollars.

AIG got into trouble when their credit ratings were downgraded and the company ran out of liquid assets. The federal government first gave AIG a credit of $85 billion in exchange for a nearly 80% stake in the company. The company later received another bailout from the government, which sparked public outrage after it was learned that AIG had given out massive bonuses to a group of high paid executives. Many Americans felt that taxpayer money should not be going to companies rewarding executives

In spite of all the negative publicity, the government and President Barack Obama have stood behind AIG. They argue that the insurance giant is so deeply intertwined with the financial system that its failure could ruin the country’s already shaken economy. According to reports, AIG provides insurance to more than 30 million policyholders and 100,000 different entitles, including small businesses, government entities, pension funds, and multi national corporations.

#2 Citigroup

$55 to $351 billion

Citigroup is an American financial services company based out of New York. They are estimated to have the world's largest financial services network with over 12,000 offices across the globe. As of this date, they have received two TARP payments from the federal government totaling $50 billion. In addition, the government has also assured up to $301 billion of the company’s assets. Meaning the company could end up receiving over $300 billion dollars of taxpayer money.

So far, the government has had to issue one $5 billion payment to Citigroup because of the asset guarantee. When Citigroup reported huge losses earlier in the year they had to absorb losses totaling $29 billion, but received $5 billion from the Treasury and another $10 billion from the FDIC.

So far, Citigroup has avoided making headlines for executive bonuses. The company claims they are using their funding to expand the flow of credit in the economic crisis and to get loans out to eager borrowers. They even formed a committee to oversee the way their TARP money is being spent.

#3 Bank of America

$45 to $163 billion

According to the Charlotte Business Journal Bank of America Corporation is the world’s largest financial services company in the world. However, along with most of the country’s financial institutions they needed support from the federal government. They were given two payments for stock ($25,000 on October 28, 2008 and $20,000 in January 2009), and received a federal asset guarantee of up to $118 billion. However, it is also important to note that they were paid an estimated $6 billion by AIG during the financial crisis (AIG reportedly used TARP money to make this payment).

Bank of America did receive some lash-back for their decision to acquire Merrill Lynch with out citing their lack of immediate proper funding. However, the federal government had little choice but to offer Bank of America more assistance, as thousands of businesses and taxpayers depend on the bank.

#4 JPMorgan Chase

$25 billion

JPMorgan Chase & Co. is considered one of the oldest financial services firms in the world, but began having asset problems along with all the other banks in the country. On October 28, 2008 they were given $25 billion as part of the government’s initial TARP payments. The company has stayed relatively off the radar since receiving the funds, except for when it was learned that they had made tentative plans to purchase new corporate jets after receiving bail out money. However, they quickly put out a statement announcing that all of their federal debts would be repaid before any jets were purchased.

#5 Wells Fargo

$25 billion

Wells Fargo & Co. is widely considered the “The World's Safest US Bank” after they became the only US bank to be rated AAA by the S&P. Not surprisingly, the bank has had what many are calling one of the most successful bailout stories of the top 10. After receiving federal aid, Wells Fargo made a recent announce to its investors to expect a profit of $3 billion for the quarter. While at face value this seems like a great victory for the banks and economy, some skeptics point out they may not be out of danger. Wells Fargo bought out Wachovia, inheriting some mortgage loans and a lot of government regulation, not to mention missing information and unclear capital numbers. Only time will tell if the acquisition will hurt or help the giant financial institution.

#6 General Motors

$13.4 to $18.4 billion

General Motors Corporation (GM) and Ford have both been in the news about the money they received from the government. However, GM is the only of the automakers to make our top 10 list. So far, they have received an estimated $13.4 billion in bailout funds, and have already requested more help. It’s also important to note that the $13.4 billion does not include an estimated $5 billion that the federal government announced they would be GM and Ford for “for payments to suppliers from participating auto companies,” under a new Auto Supplier Support Program.

As I mentioned before, GM had requested additional funds from the government but President Obama’s administration rejected their proposal. They did agree to provide GM with working capital for the next 60 days, but said that during that time they would “be working closely with GM to produce a better business plan.”

#7 The Goldman Sachs Group, Inc.

$10 billion

The Goldman Sachs Group had managed to avoid controversy, until they recently began selling their stocks to help repay the $10 billion they received from the TARP program. While most onlookers would consider this a good thing, many financial experts are afraid this early repayment will overpressure other banks to repay their debt prematurely. The main concern is that if too many banks follow suit, it could “harm the recovery effort”. Of course, Goldman Sachs benefits from this early repayment by freeing themselves of government restrictions, including spending and bonus caps.

#8 Morgan Stanley

$10 billion

Morgan Stanley is a New York based financial services provider, and unlike many other TARP recipients, they have been very open about when and how their TARP money is being used. They claim to have used some of the money towards their capital account, while additional funds were lent to Verizon Wireless.

Another smart move by Morgan Stanley is their upfront admittance that their debt will not be paid back any time soon. CEO John Mack publicly stated that, “as much as we’d like to give the money back and just focus on not having government involvement, being totally a public entity, we think and I think that it’s the wrong time to do it now... The reason that money was put in the hands of these banks is to help get us through this very difficult time in financial markets and a very difficult time in the economy.”

#9 Merrill Lynch & Co.

$10 billion

Merrill Lynch was amongst the banks hit hardest by the market crash last year. The company received a TARP from the federal government in the amount of $10 billion before Bank of American bought them out at the end of 2008. The company was also received an estimated $6 billion from AIG, who claims to have used TARP money to make the payment.

In addition to the controversy around their Bank of America buy out, Merrill Lynch has also made headlines for huge bonuses paid to executives. Unlike AIG however, Merrill Lynch has not made the list of bonus recipients public, so the American taxpayers really have no idea of knowing if TARP money was used for the bonuses or not.

#10 PNC Financial Services Group

$7.5 billion

PNC is the country’s 5th largest bank, and they first made a big splash one the bailout scheme when they acquired the Cleveland bank National City (NCC) in October of 2008. PNC used some of the money given to them through the TARP program to make the acquisition, and many called this transaction the first real “test” of TARP funds since no one was quite sure how the deal would work out. As of January of 2009, PNC claims that they did see losses immediately after their purchase, but did not think they would need any more TARP money to pull through the recession.

IRS Challenges AIG Unit Tax Deals: Report

The IRS is challenging certain unit tax deals structured by AIG, reports Reuters.com. Check out a snippet of their article explaining why the IRS would take such a position below.

The U.S. Internal Revenue Service is challenging some of the tax deals structured by AIG Financial Products Corp, the unit of the giant insurer that has caused political outrage over $165 million in employee bonuses, the Wall Street Journal said.

Some banks that received government-funded payouts to settle contracts with American International Group turned to the insurer for help cutting their income taxes in the U.S. and Europe, the paper said, citing court records and people familiar with the business. The company paid $61 million last year in disputed taxes stemming from the deals, but sued the U.S. government last month in federal court in New York, seeking a refund, the paper said, citing filings in the case.

Banks that worked with AIG on tax deals include France's Credit Agricole SA, Bank of Ireland and Bank of America Corp, the paper said, citing AIG's lawsuit. The banks declined to comment to the paper.

In general, AIG's tax deals permitted U.S. companies and foreign banks to effectively claim credit in their home country for a single tax payment, partly through the use of an offshore AIG subsidiary, the paper said.

In its lawsuit against the government, the insurer said it was told by the IRS that AIG hadn't shown that the transactions "had sufficient economic substance and business purpose" to justify tax benefits, the paper said. The IRS declined to comment to the paper.

An AIG spokesman declined to discuss with the paper the tax-cutting transactions in detail but asserted that the tax benefits were proper and justified, the paper said. AIG wants to "ensure that it is not required to pay more than its fair share of taxes," the paper cited the company spokeswoman as saying.

Congress on AIG and Banks: 'Oppressive, Unjust and Tyrannical.'

From: The Wall Street Journal:

When does a single policy blunder herald much larger economic damage? Sometimes it's hard to know ahead of time. Few in Congress thought the Smoot-Hawley tariff was a disaster in 1930, but it led to retaliation and a collapse of world trade. The question amid Washington's AIG bonus panic is whether Congress's war on private contracts and the financial system is a similarly destructive moment.

It is certainly one of the more amazing and senseless acts of political retribution in American history. In its bipartisan rage, the House saw fit last week not merely to punish the employees of AIG's Financial Products unit that the company still needs to safely unwind credit default swaps. The Members voted, 328-93, to slap a 90% tax on the bonuses of anyone at every bank receiving $5 billion in TARP money who earns more than $250,000 a year. A draft Senate version is even broader. Never mind if the bonus was earned last year or earlier, or under a legally binding employment contract. The confiscatory tax will apply ex post facto.

Never mind, too, that such punitive laws were expressly deplored by America's Founders. In Federalist 44, James Madison warned that "Bills of attainder, ex post facto laws, and laws impairing the obligation of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation."

In 1827 in Ogden v. Saunders, the U.S. Supreme Court issued a similar warning about legislative limits under Article I, Section 10 of the Constitution: "The states are forbidden to pass any bill of attainder or ex post facto law, by which a man shall be punished criminally or penally by loss of life of his liberty, property, or reputation for an act which, at the time of its commission, violated no existing law of the land," wrote Justice Bushrod Washington.

"Why did the authors of the Constitution turn their attention to this subject, which, at the first blush, would appear to be peculiarly fit to be left to the discretion of those who have the police and good government of the state under their management and control? The only answer to be given is because laws of this character are oppressive, unjust, and tyrannical, and as such are condemned by the universal sentence of civilized man."

Yes, Article I, Section 10 applies to the states, and this is a federal law. Congress may also figure it avoids the "bill of attainder" objection by applying the law to individuals at several companies receiving TARP money. But Congress's willingness to wreak such vengeance against a specific class of Americans is still as offensive as a matter of principle as Justice Washington and the Federalist Papers noted. The Founders feared the punitive whim of the legislative mob as much as they did the tyranny of a King.

Taxing Bonuses

We are all angry about the AIG bonuses, rightfully so. By offering large bonuses to AIG leadership, we are rewarding gross incompetence. “You utterly destroyed this company. Nice job, here’s your stack of cash.”

What can be done about it now, though? A handful of lawmakers have suggested taxing these bonuses at an enormously high rate. Ok, that will effectively give the money back to the government. But this is using taxes to punish people. And that is not the purpose of taxes.

Taxes are paid to create revenue streams for operating government bodies. The tax code is not an alternative to jail time, nor should it be. This will create a dangerous precedent. What’s next? Drug dealers can avoid prosecution by paying a higher tax rate?

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In Twist, AIG Sues Its Benefactor Over Taxes

From The Wall Street Journal:

In the midst of its negotiation with the federal government over revised terms of its bailout, American International Group Inc. sued the U.S. on Friday over a disputed $306 million in taxes, interest and penalties.

The suit steps up a battle with the Internal Revenue Service largely over AIG's use of a controversial type of "tax arbitrage" transaction that authorities are challenging across the world.

With the company essentially suing its owner, the suit highlights the awkwardness of national control of AIG, which the government rescued from potential bankruptcy in September. If through litigation "you're moving money from one pocket to another, why should we be paying lawyers to do that?" says David Weisbach, a tax law professor at the University of Chicago.

"AIG is taking this action to ensure that it is not required to pay more than its fair share of taxes," said a company spokeswoman. An IRS spokesman declined to comment.

In its lawsuit, filed in U.S. District Court in Manhattan, AIG for the first time laid out significant details about its role in the so-called "foreign tax generators" in dispute with the IRS. The general nature of the disagreement was previously disclosed in company securities filings and reported by The Wall Street Journal in May.

The foreign tax credit transactions detailed in the lawsuit took place in 1997, but AIG said in a securities filing that it also expects the IRS to challenge similar deals from more-recent years. The company paid the amounts in dispute and is now suing for a refund.

AIG Seeks IRS Refund for $329 Million

Weeks after getting billions of dollars in federal bailouts, American International Group Inc. (AIG) is seeking over $300 million from the Internal Revenue Service (IRS).

According to the Wall Street Journal, “the clash dates from before the bailout,” and that “the company disclosed in a securities filing this week that it filed a ‘claim for refund’ with the IRS” for $329 million.

However, AIG’s timing of the announcement comes shortly after the company received an estimated $150 billion in multiple bailouts from the Federal government. Additionally, the company also made headlines for lavish weekend conferences costing hundreds of thousands of dollars. WJS.com claims that AIG is in “the peculiar position of effectively using government funding to fight the U.S. government.”

AIG Plans Another Lavish Resort Event

Last week, AIG (American International Group Inc.) got lots of bad publicity for hosting a $440,000 conference just weeks after getting bailed out by the federal government. Both the White House and Congress spoke out in displeasure, and both presidential candidates have also chastised AIG for the costly event. However, according to Bloomberg, they are already planning another.

“The event, at the Ritz-Carlton in California's Half Moon Bay, aims to ‘motivate and educate'’ about 150 independent agents who sell AIG coverage to high-end clients, said spokesman Nicholas Ashooh.

White House spokeswoman Dana Perino today called ‘despicable’ expenses from the first gathering, a weeklong conference last month at the St. Regis Resort in Monarch Beach. Those costs included $23,000 for spa services, according to Representative Henry Waxman, chairman of the Oversight and Government Reform Committee.

AIG considered buying advertisements to explain its position, only to be told by public relations consultant George Sard that it would be ‘a really bad idea.’

‘To spend the taxpayer's money on an expensive ad campaign to apologize for how you used taxpayer money leaves you open to further attacks,’ Sard wrote in an e-mail to Ashooh. Sard, chief executive officer of New York-based Sard Verbinnen & Co., said the message was a private e-mail mistakenly sent to Bloomberg and wasn't intended to be a public statement.

President George W. Bush didn't push for the bailout ‘to help top executives go to a spa,’ Perino said today at the daily White House briefing. Hours later, the Federal Reserve agreed to loan AIG an additional $37.8 billion on top of the initial $85 billion.

AIG Chief Executive Officer Edward Liddy, who replaced former CEO Robert Willumstad as a condition of the federal loan, today told Treasury Secretary Henry Paulson that the company intends to reevaluate expenses.

‘We understand that our company is now facing very different challenges,’ Liddy wrote in a letter to Paulson. ‘We owe our employees and the American public new standards and approaches.’

Stocks Sink After Government Bailout of AIG

From the Associated Press:

Wall Street stumbled again Wednesday, with anxieties about the financial system still running high even after the government bailed out the insurer American International Group Inc. The Dow Jones industrial average dropped about 300 points.

The Federal Reserve is giving a two-year, $85 billion loan to AIG in exchange for a nearly 80 percent stake in the insurer, after it lost billions in the risky business of insuring against bond defaults. Wall Street had feared that the conglomerate, which has its tentacles in various financial services industries around the world, would follow the investment bank Lehman Brothers Holdings Inc. into bankruptcy.

"People are scared to death," said Bill Stone, chief investment strategist for PNC Wealth Management. "Who would have imagined that AIG would have gotten into this position?"

He said the fear gripping the market reflects investors' concerns that AIG wasn't able to find a lifeline in the private sector and that Wall Street is now fretting about what other institutions could falter.

The two independent Wall Street investment banks left standing — Goldman Sachs Group Inc. and Morgan Stanley — remain under scrutiny, as does Washington Mutual Inc., the country's largest thrift bank. Morgan Stanley revealed its quarterly earnings early late Tuesday, posting a better-than-expected 7 percent slide in fiscal third-quarter profit. It insisted that it is surviving the credit crisis that has ravaged many of its peers.

Lehman filed for bankruptcy protection on Monday, and by late Tuesday had sold its North American investment banking and trading operations to Barclays, Britain's third-largest bank, for the bargain price of $250 million. Over the weekend, Merrill Lynch, the world's largest brokerage, sold itself in a last-ditch effort to avoid failure to Bank of America Corp.

The troubles in the financial sector could exacerbate the problems facing the weak U.S. economy, given that individuals and businesses rely on the nation's money centers.