The insurance company AIG took a big step Monday toward paying back some of the bailout money it received, selling its valuable Asian subsidiary to the British insurance giant Prudential for more than $35 billion in stock and cash.
But AIG, which will use the proceeds to reimburse the U.S. government, still faces huge losses and it's not clear how much money it will be able to raise down the road.
"This particular unit is one of the jewels in AIG's crown," said Joseph Mason, professor of finance at Louisiana State University. "One of the thing that this unit brings with it is life insurance written against a demographically young population in Asia."
AIG is also expected to sell a separate unit to Metlife soon. The insurance giant collapsed in September 2008 largely because of massive liabilities it incurred in the market for credit default swaps. Since then the company has become the largest single recipient of government aid. The U.S. pledged about $180 billion to AIG, all but about $50 billion has been used.
But with public souring on the bailouts, AIG has faced pressure to pay the money back, said Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics.
"They really have no choice," Whalen said. "The government and the Federal Reserve want to be paid back and the only prospect for doing so is to sell assets."
The problem, Whalen said, is that after unloading these two units AIG simply won't have many assets left to sell.
"It's a good thing, but these are some of the best assets that AIG has so I'm not sure we're going to see anything like the proceeds that we need for the government to be paid back in full," he said.
'Where Does This All Stop?'
Whalen noted that AIG now has a market capitalization of about $3.5 billion.
"Once you sell the Asian business, which, as I say, is one of the most attractive businesses they have, and you lose that cash flow you lose, that revenue what's left is going to be worthless, by definition," Whalen said.
At the same time, AIG said last week that it lost another $9 billion during the last three months of 2009, far less than it had lost in the disastrous last quarter of 2008, but a sign the worst isn't over for the company, Mason said.
"The big question is where does all this stop?" he said. "When do the losses stop rolling in as a result of the subprime experience and related upheavals and when do we get back to stable value for those assets?"
That is a question U.S. taxpayers want answered as well. Many big banks have already paid back some or all of the largesse they received from the federal government. But AIG, like Fannie Mae and General Motors, faces much longer odds; even if it can stop losing money, it's likely to emerge from the turmoil a much smaller and weaker company.