Illinois Government Consultants Incorporated

The American International Group said Thursday that it had reached an agreement in principle to repay the Federal Reserve Bank of New York for the company’s 2008 rescue, and to gradually return the ownership of its stock to the public markets.

The company and its rescuers in the federal government have been working intently in recent weeks to complete such a plan before the expiration of the Treasury’s Troubled Asset Relief Program on Oct. 3, and before the Fed’s bailout loan came due. The original terms called for A.I.G. to pay back the Fed within two years.

Under the plan, the Treasury Department will, for a time, own 92.1 percent of A.I.G. before it begins to sell it shares.

Because A.I.G. turned out to need a bigger rescue package than first expected, the Fed loan changed, and the insurance giant now owes the Fed about $46 billion in two forms: about $20 billion in borrowings under the original revolving credit facility, and a $26 billion preferred stake that the company must redeem. A.I.G. said it would repay those amounts by the end of March 2011.

The company said it would use its own resources to pay back the $20 billion in loans, including the proceeds it expects to receive from the sale of a big overseas life insurance unit to MetLife. That sale, announced in March, should yield $6.8 billion in cash and $8.7 billion in MetLife stock, and close by the end of the year.

Still more money to repay the Fed is expected to come from an initial public offering of a second big foreign life insurance business on the Hong Kong exchange. The offering was delayed for several months while A.I.G. tried unsuccessfully to sell the unit to a British company, but A.I.G. now says the Hong Kong offering is back on. It did not provide a time frame.

In addition, the Treasury has agreed to help the Fed sever its ties with A.I.G., by providing the means for the company to redeem most of the Fed’s $26 billion in preferred interests. That money will come from the unused portion of an emergency assistance package that the Treasury made available to A.I.G. as its troubles reached a peak in early 2009.

A.I.G. said it would use $22 billion of that money to redeem an equal amount of the Fed’s preferred stake, then immediately transfer the stake to the Treasury. The company said it would redeem the remaining $4 billion with the “proceeds from future asset monetizations,” including sales of two smaller Japanese insurance units that were also announced Thursday morning.

Taking all of those steps will end the Fed’s role as a lender to A.I.G. and an investor in the company, a role that has never fit in well with the Fed’s duties as a central bank. The Treasury will come out of the transaction with a larger preferred stake in A.I.G., but expects the company to keep taking steps to pay it down, according to the new agreement in principle.

Once the Fed has been fully repaid, the agreement calls for A.I.G. to exchange all of the Treasury’s preferred shares for 1.65 billion shares of common stock. To offset the dilution of A.I.G.’s current common shareholders, the company said it would issue up to 75 million warrants, which would allow those non-government shareholders to buy more common stock in the future, for $45 a share.

When the exchange from preferred to common has been done, the Treasury will be able to sell its common shares on the public markets, something it is expected to do gradually over time. Timing of the share sale could be crucial to determining the actual amount of money that will be returned to taxpayers. If shares are sold too quickly, it could drive down the company’s market value and lessen the return.

The A.I.G. chief executive, Robert H. Benmosche, said in a statement that the plan would allow the company to “remain on track to emerge with one of the largest, most diversified property and casualty companies in the world.”

The Treasury issued a statement Thursday saying the agreement “dramatically accelerates the timeline for A.I.G.’s repayment and puts taxpayers in a considerably stronger position to recoup our investment in the company.”

In the statement, Treasury Secretary Timothy F. Geithner said: “While there is a lot of work ahead to execute this agreement, today we are much closer to seeing a clear path out.”
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Source: The New York Times

The director of the nonpartisan Congressional Budget Office said on Thursday that permanently extending tax cuts put in place under President George W. Bush would provide a “considerable” economic boost over the next several years but would result in substantial increases in the federal deficit, placing the country in a precarious fiscal situation by 2020.

In offering this assessment, Douglas Elmendorf underscored the difficult choice facing lawmakers as they debate whether to extend any or all of the tax breaks, which are scheduled to expire at the end of the year.

The CBO’s analysis was part of a broader report released Thursday in which the agency projected that the federal government’s budget deficit for this year would be $1.34 trillion. The figure is slightly below last year’s total, but the CBO warned that policymakers face “daunting” challenges in the years ahead in trying to return the country to fiscal sustainability.

Concerns about the federal deficit have been figuring prominently in congressional debates over whether to spend more money on programs to stimulate the economy and to help the unemployed, as well as over the Bush-era tax cuts.

The CBO examined the impact if most of those cuts are extended. This scenario assumed that the breaks for higher-income taxpayers would expire.

“Under that . . . scenario, economic growth would be stronger next year; unemployment would be lower next year,” Elmendorf said. But he added that “over time, that extra borrowing — and it’s a good deal of extra borrowing — would have negative consequences on the economy.”

Republicans and many representatives of business have pushed for a permanent extension of all the tax cuts, arguing this would jump-start economic growth. They warn that allowing taxes to rise could stifle the recovery.

The Obama administration and Democratic leaders in Congress are seeking to extend tax cuts for Americans earning less than $250,000 a year, while letting expire some of those for wealthier individuals. Democrats say this would help stimulate the economy and cost the government less than if all cuts were extended.

The CBO’s baseline scenario assumes that the Bush-era tax breaks will expire, as current law provides. In that case, next year’s deficit would fall to $1.07 trillion, or 7 percent of the country’s total economic output, or gross domestic product, according to agency estimates. By 2012, the deficit would shrink to $665 billion, or 4.2 percent of GDP.

Agency analysts also projected that public debt would rise from 53 percent of GDP last year to almost 70 percent of GDP by 2020, a figure unmatched since the 1950s.

“It is an extraordinarily high level of debt by the experience of this country over the past 65 years,” Elmendorf said. “Of course, it is also an extraordinarily difficult economic situation in which we find ourselves.”

President Obama created a bipartisan commission this year to address the nation’s soaring debt. Members are considering a wide range of measures, from cuts in Medicare and Social Security to reform of the tax system. Obama has asked the group to make recommendations by Dec. 1.

On a positive note, the CBO lowered by $50 billion the estimated cost of the government’s bank bailout program, known as the Troubled Assets Relief Program. The CBO said the change was in part due to improved market conditions and a provision in the recently approved financial overhaul bill that reduced the program’s spending authority.
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Source: The Washngton Post