AIG may not need more bailout cash

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One of the financial crisis' founding institutions may – and I underscore may – be starting to heal.

American International Group (AIG), the embattled insurer rescued by the U.S. government, may post Q1 results this week that don't trigger a new capital injection from the government, Bloomberg News reported Tuesday, citing three people with the matter.

AIG will report Q1 results that will be better than the record $61.7 billion Q4 2008 loss, according to the sources, who spoke with Bloomberg News on condition that they not be identified. Shares of AIG closed Tuesday up 27 cents to $1.74.

AIG will report Q4 results on Thursday. The First Call Q1 revenue and EPS estimates are $26.2 billion and a loss of 8 cents. The First Call F2009 revenue and EPS estimates are $109.4 billion and 12 cents.

AIG: Too interconnected to fail

Further, if AIG makes it though the quarter without an aid request, that would mark the first quarter since AIG's bailout in September 2008 that U.S. taxpayers would not have to bailout the company. To date, the U.S. government has committed $182.5 billion to AIG, the health of which federal officials – including U.S. Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Tim Geithner - have said is critical to maintaining the financial system. In return, the federal government received a roughly 80 percent stake in the company.

In testimony on Capitol Hill earlier this year, both Bernanke and Geithner -- without specifying the details of AIG's losses -- signaled in no uncertain terms the systemic implications of an AIG default, with Bernanke repeatedly justifying the intervention by using phrases like, "we had no other choice," "there were no other options," and "we did what we had to do." That led most congressional lawmakers to conclude that the nation's two highest monetary officials saw no good options regarding AIG -- certainly no cost-free options for the U.S. taxpayer.

But now it appears the ultimate size of the federal intervention in AIG will be less. About $80 billion of the federal government's commitment to AIG are loans, which AIG is trying to pay back through divestitures, among other revenue generators, Reuters reported Tuesday. Last month, AIG sold its U.S. auto insurance business to Zurich Financial Services for $1.9 billion, and sold about a dozen other businesses, netting an addition $4 billion.

Economic Analysis: If, and this is a big if, AIG does not need more bailout funds, that would be a step forward for the financial system, the economy, the stock market, and AIG, in that order of importance. That's because if we 'walk the cat back,' a non-request for bailout money cannot rest on AIG's success at raising cash from asset sales alone: undoubtedly, there would have to be some improving operating dynamic. Perhaps AIG's credit default swap payments are not being triggered at as high a level as originally projected? (That would imply better news regarding mortgage backed securities.) Or perhaps other derivatives are performing better? Or perhaps the federal government's unwinding of AIG's over-leveraged capital is going better than expected? Maybe it's a combination, but if the Q1 results don't trigger more funds, the market will likely interpret it as a possible lessening of AIG's problems, if not a bottoming out of its problems.
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