Fed reduces AIG's debt by $25 billion

AIG announced Tuesday that it completed a deal wiping out $25 billion of its debt to taxpayers by selling stakes in two subsidiaries to the Federal Reserve Bank of New York.

The troubled insurer gave the New York Fed preferred shares of two of its international life insurance companies, including $16 billion of American International Assurance Co. and $9 billion of American Life Insurance Co. The deal was originally announced in March.

The deal brings the New York-based insurer's debt to the New York Fed down to $17 billion. AIG also still owes the U.S. Treasury $44.8 billion from a separate Troubled Asset Relief Program (TARP) loan, so the insurer still owes taxpayers just under $62 billion.

AIG Chief Executive Bob Benmosche said, in a press release, that the debt reduction "sends a clear message to taxpayers: AIG continues to make good on its commitment to pay the American people back."

AIG's (AIG, Fortune 500) stock rose more than 4% on the news in morning trading.

"The agreements further the goals of enabling AIG to fully repay the assistance that it has received from U.S. taxpayers and advancing the company's global restructuring process," the New York Fed said in a statement when the deal was first announced in March.

The Federal Bank of New York initially provided $85 billion worth of support to AIG in September 2008, when the company was on the brink of collapse. AIG's government rescue plan has since been restructured three times, and its total bailout is now worth up to $182 billion.

But much of that bailout has come in the form of government asset purchases that AIG does not need to repay. In addition to the $25 billion announced on Tuesday, the government in March bought up nearly $40 billion of insurance agreements and mortgage-backed securities held by AIG and its business partners.

To pay back the remaining $62 billion it owes the government, AIG will continue to sell off its assets. Despite recording two straight profitable quarters, AIG has said it will not generate enough earnings to repay taxpayers with profits alone.

AIG said Tuesday's transaction will force the company to take a hefty $5.7 billion restructuring charge in the current quarter, which will likely wipe out any profits AIG would have registered in the last three months of 2009.

Despite the government support, the company still faces a steep uphill battle to return to health. Shares of the insurer tumbled 15% Monday, after Bernstein Research analyst Todd Bault told investors that he cut the 12-month price target to $12 a share from $20 because the insurer's "loss reserves are significantly deficient again, much sooner than we would have forecast two years ago."

On Nov. 25, AIG announced that it had resolved its legal dispute with former chairman Maurice "Hank" Greenberg.

Goolsbee To AIG Execs: Give The Money Back

Appearing on Face The Nation Sunday, Austan Goolsbee, a member of the White House Council of Economic Advisors, told CBS News' Harry Smith that while the President is angered at the bonus situation at AIG, "We don't want to govern out of anger."

Asked how the White House plans to recover taxpayer money lost in the retention bonuses given to AIG executives (including some not retained by the company), he said President Obama is "going to look at what comes out of the House, what comes out of the Senate, see what ideas we have. At the least there is public pressure and there should be public pressure on those people at A.I.G. who aren't being paid for performance but are being paid for having lost $170 billion.

"Give the money back," Goolsbee said.

Goolsbee said the president is aware of the severity of the breach of public trust caused by the AIG scandal.

"It's one thing to be a gambler and to gamble with your own money. But here they're gambling with the retirement accounts of our parents and the college funds of our children."

Companies receiving bailouts "would not exist if it weren't for the U.S. Government. Now that makes them different than some of the other institutions which I'm sure we'll talk about with the financial rescue. But we can't let our anger over mistakes that happened last year block the fact that we've got to save the economy."

Goolsbee confirmed that the White House toxic asset plan will be released tomorrow, and in a quick preview he told Smith, "the basic idea is outlining the details of a public-private partnership so that we leverage money from the government with the private sector, so that the government doesn't get in the business of overpaying for assets and things like that."

The economic advisor was skeptical of the theory that private sector business would be turned off by the amount of government involvement in the Obama administration's plan.

"What we saw this week and what we have seen in our discussions with people is that if you lay out clear rules that are responsible, people want to participate if there's a business reason to participate. In this circumstance where we're trying to encourage the private sector to participate, that's going to be treated totally differently than companies like AIG or Fannie Mae where they are only in business because the government saved them."

He argued, however, that the President does not advocate putting controls on executive compensation.

"The president has, for more than a year, been calling for financial regulatory reform. And the centerpiece of that regulatory reform is to prevent the $170 billion bailout of AIG type where a life insurance company morphs into a hedge fund, turns into a loss that is too big to fail and the government has to come in. The point of regulatory reform is to prevent that," he said.

"Everybody has skin in the game" Goolsbee said, describing the relationship between private and public companies and the government.

Finally, he said that the gloomy Congressional Budget Office's economic forecast was "much more pessimistic about the long-run strength of the U.S. economy" than were those of private analysts and the White House.

Goolsbee reiterated that Mr. Obama is committed to cutting the deficit in half by the end of his term while investing in health care, clean energy and education. "He'll be working with Congress and he's outlined a budget program and these principles of making those three key investments and cutting the deficit in half, and I believe he's going to be able to do that," Goolsbee reasoned.

U.S. Treasury Demands Changes in AIG Plans for Bonus Payments

The U.S. Treasury ordered American International Group Inc., the insurer saved from collapse by taxpayer bailouts, to overhaul plans to give out multimillion- dollar bonuses and repay the government for some 2008 payments, according to a person briefed on the matter.

Treasury Secretary Timothy Geithner telephoned Chief Executive Officer Edward Liddy on March 11 to demand changes to AIG’s bonus payments, an administration official said separately.

AIG was rescued by the government in September after its bets in the derivatives market threatened to bankrupt the insurer.

AIG’s Liddy Says Greenberg Responsible for Losses

American International Group Inc. Chief Executive Officer Edward Liddy said ex-CEO Maurice “Hank” Greenberg, credited with building the company into the largest insurer, was partially to blame for the firm’s woes.

“I think he’s responsible” for some of the insurer’s struggles, Liddy said today in an interview. “The formation of the AIGFP unit, which has literally brought us to our knees, that happened on his watch. The compensation systems that have gone astray, happened on his watch. I don’t think it’s as clean and simple as sometimes Hank would like to portray.”

Greenberg was at the helm during the formation of AIG’s financial products unit, which sold derivatives that cost the company more than $30 billion in writedowns and prompted a government rescue, Liddy, 63, said today on Bloomberg Television. New York-based AIG today reported the biggest loss by a publicly traded U.S. firm and announced that it reached an agreement to restructure its federal bailout.

Greenberg, who led AIG for almost 40 years before being forced to retire in 2005, has said Liddy is not equipped to run the company and called the sale of the firm’s insurance units to repay the government a “tragedy.” Greenberg told Congress last year that risk controls he put in place were weakened or eliminated after he left.

Liddy, the former CEO of home and auto insurer Allstate Corp., was appointed in September to run AIG after the insurer agreed to turn over an 80 percent stake to the government in exchange for an $85 billion loan.

Greenberg’s Response

The financial products unit was profitable until after Greenberg left, his spokeswoman, Liz Bowyer, said in a statement today.

The losses “never would have happened - and in fact did not happen,” while Greenberg was in charge, Bowyer said. “Under Mr. Greenberg’s leadership, AIG grew from a modest enterprise into the largest and most successful insurance company in the world. Its market capitalization increased approximately 40,000 percent between 1969, when AIG went public, and 2004, Mr. Greenberg’s last full year as chairman and CEO.”

AIG was unchanged at 42 cents in New York Stock Exchange composite trading at 4:15 p.m. after the U.S. committed as much as $30 billion in additional capital. The insurer, which posted a fourth-quarter loss of $61.7 billion, has plunged 99 percent in the past 12 months.

Credit Guarantees

The financial products unit was founded in 1987 by ex- employees of Drexel Burnham Lambert, the securities firm that helped popularize “junk-bond” investing. It was headed by Joseph Cassano, who built the business into one that provided guarantees on more than $500 billion of assets at the end of 2007, including $61.4 billion in securities tied to subprime mortgages.

Cassano stepped down in March 2008, agreeing to stay on as a consultant earning $1 million a month until U.S. lawmakers lambasted the arrangement in October.

Liddy was appointed by the U.S. to run AIG after it needed an $85 billion federal loan to stave off bankruptcy in September. He is AIG’s third CEO since Greenberg, who was forced to retire four years ago amid state and federal probes into accounting and sales practices.

Greenberg denies any wrongdoing in a New York State civil lawsuit filed against him in May 2005, which is still pending. Then-New York Attorney General Eliot Spitzer dropped portions of the lawsuit in 2006 that included four other allegations tied to the investigation.

Greenberg still controlled the largest stake of AIG shares before the government takeover through personal holdings and investment firms C.V. Starr & Co. and Starr International Co.