American International Group said Thursday that it reduced its obligations to the Federal Reserve Bank of New York by $25 billion, leaving it with only $15 billion more to pay back to one of its most important regulators and rescuers. But the New York Fed is a long way off from being able to retire even that $25 billion, because, at the moment, it’s just made up of illiquid shares in two of AIG‘s life insurance divisions.
AIG had always planned to pay off the $190 billion in debt it owes to the U.S. government and to the Fed by selling off the profitable divisions of the once mighty insurance conglomerate. But so far, asset sales haven’t put a meaningful dent in AIG’s debt and this major deal, involving the spin-off of American International Assurance Co., its Asian life insurance company, and American Life Insurance Co., its global life insurer, is far from complete. AIG wants to turn both divisions into standalone companies with the New York Fed getting a $16 billion stake in the Asia business and a $9 billion stake in the global division. AIG plans to eventually take both companies public so that the Fed will be able to cash in its shares. Otherwise, the Fed will have to sell its stakes in a private transaction or ask for a dividend from each company.
“AIG is merely shifting one form of paper for another form of paper,” says Martin Weiss, president of Weiss Research, an independent stock analysis firm. “It is not making progress in repaying the U.S. government. It’s making progress in stiffing the U.S. government.”
The market was unmoved by AIG’s gesture. Shares nudged up only two pennies to $1.44. Major holders of AIG stock include the large passive money management firms. State Street owns 3.7% of the public float, worth $143 million, while Barclays (largely through its iShares exchange traded funds) and Vanguard own similar amounts. The U.S. government owns 80% of the company.
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