Published: 01 Oct 2010
Last Updated: 01 Oct 2010
The American economy may not be out of the woods yet, but it seems like things are looking up across the pond. Insurance giant AIG, a bail-out basket case only a year or two ago, has today issued a cunning plan to get the US government out of its hair, and reward taxpayers’ generosity with a $16bn profit, to boot. Meanwhile, American stocks posted their best September since 1939, with an 8.8% rise in the Standard & Poor’s 500.
The AIG deal in particular is worth closer attention, in case there are lessons which can be learned by the UK authorities when it comes to disposing of all those bank shares which we have been taking care of since the crisis. So how will it work?
Well, as you may recall, for the last two years AIG has been a ‘ward of the state’, 80% owned by the US taxpayer. Having been deemed ‘too big to fail’ back in 2008, it was granted an eye-watering $182bn loan facility, of which it claims to have used a ‘mere’ $101bn to date. As well as burning government cash, it has got through no fewer than four CEOs over the same period – perhaps one of the reasons why current incumbent Robert Benmosche was keen to publish this exit plan ahead of the bailout’s second anniversary next week.
The deal – set to ‘dramatically accelerate’ AIG’s repayments to the government, according to Treasury Secretary Tim Geithner, involves the US Treasury converting its current $49.1bn of debt into a 92% stake in AIG – 1.655bn common shares, in fact. Existing shareholders will be issued with warrants to prevent dilution of their stakes.
Although that leaves the government with a larger stake (currently it holds 80%), the swap will allow the Treasury to sell its holding on the open market – over a period of time of course. And if all goes according to plan the sale will reap a net gain of $16bn. If it doesn’t – well at least one sceptic, in the form of ex-AIG CEO Hank Greenberg, fears that the government may end up unable to shift all those shares for a decade or more.
Of course, any equity sale is dependent on the usual provisos – the main one being that someone has to want to buy the shares for the expected price. So it’s just as well that the S&P 500 has had a vintage September, rising nearly 9%, its best performance in 71 years.
However, whilst stock prices themselves are doing well, trading volumes are low and the short index (which tracks short-sellers, ie those investors who are betting on the market falling rather than rising) is equally buoyant, at 4.6% of total outstanding shares on the S&P 500.
So it looks like Wall Street is set for an almighty tussle between the bulls and the bears. And before you ask - no, we don’t know who’s going to win either.
The AIG deal in particular is worth closer attention, in case there are lessons which can be learned by the UK authorities when it comes to disposing of all those bank shares which we have been taking care of since the crisis. So how will it work?
Well, as you may recall, for the last two years AIG has been a ‘ward of the state’, 80% owned by the US taxpayer. Having been deemed ‘too big to fail’ back in 2008, it was granted an eye-watering $182bn loan facility, of which it claims to have used a ‘mere’ $101bn to date. As well as burning government cash, it has got through no fewer than four CEOs over the same period – perhaps one of the reasons why current incumbent Robert Benmosche was keen to publish this exit plan ahead of the bailout’s second anniversary next week.
The deal – set to ‘dramatically accelerate’ AIG’s repayments to the government, according to Treasury Secretary Tim Geithner, involves the US Treasury converting its current $49.1bn of debt into a 92% stake in AIG – 1.655bn common shares, in fact. Existing shareholders will be issued with warrants to prevent dilution of their stakes.
Although that leaves the government with a larger stake (currently it holds 80%), the swap will allow the Treasury to sell its holding on the open market – over a period of time of course. And if all goes according to plan the sale will reap a net gain of $16bn. If it doesn’t – well at least one sceptic, in the form of ex-AIG CEO Hank Greenberg, fears that the government may end up unable to shift all those shares for a decade or more.
Of course, any equity sale is dependent on the usual provisos – the main one being that someone has to want to buy the shares for the expected price. So it’s just as well that the S&P 500 has had a vintage September, rising nearly 9%, its best performance in 71 years.
However, whilst stock prices themselves are doing well, trading volumes are low and the short index (which tracks short-sellers, ie those investors who are betting on the market falling rather than rising) is equally buoyant, at 4.6% of total outstanding shares on the S&P 500.
So it looks like Wall Street is set for an almighty tussle between the bulls and the bears. And before you ask - no, we don’t know who’s going to win either.
