April 20, 2024

DealBook: Winding Down the Bailouts, and Trying Not to Lose Money

Timothy Massad, an acting assistant Treasury secretary, said 75 percent of the taxpayers' money was recovered.Andrew Harrer/Bloomberg NewsTim Massad, an acting assistant Treasury secretary, said 75 percent of the taxpayers’ money had been recovered.

After months of planning, the federal government has sold the first batch of shares that it owns in the American International Group, the most prominent reminder of the wreckage of 2008.

But much hard work remains.

As the Treasury Department winds down its numerous bailout programs, it must still contend with disposing of its legacies of the financial crisis: big investments in rescued companies like A.I.G. and General Motors.

After Tuesday’s $8.7 billion offering of A.I.G., Treasury still needs to sell more than 1.4 billion common shares, perhaps over the next two years or so. (In addition to an approximately 77 percent stake in A.I.G., it also owns about $11.3 billion in preferred shares.)

All told, Treasury still has $53 billion invested in A.I.G., while the Federal Reserve Bank of New York also has about $23.6 billion in loans to two A.I.G.-related investment vehicles.

And the Treasury Department also maintains significant stakes in other rescued companies. It currently owns about a 26 percent stake in G.M., down significantly after it raised $23.1 billion in a highly regarded initial stock offering. It also owns a 6.6 percent stake in Chrysler and a 74 percent stake in Ally Financial.

Stock sales for Chrysler and Ally are in the offing; Ally’s offering may take place as soon as the end of June. On Tuesday, Chrysler repaid $5.9 billion in loans to the Treasury Department as well.

So far, shares in the two companies in which the Treasury Department has already sold stock have declined. Shares in A.I.G. tumbled on Wednesday to a new low for the year, down 4 percent, to $28.28. That is below the Treasury Department’s break-even price of $28.73. And shares in G.M. have fallen more than 8.5 percent since its November initial offering, closing on Wednesday at $31.27.

In the government’s reckoning, it has done well so far. Treasury Department officials say that the goal of the various bailout initiatives, including the $700 billion Troubled Asset Relief Program, was to prevent an economic collapse. Earning any sort of profit would essentially be gravy, they contend.

As of now, the federal government has already recouped nearly 73 percent of its total TARP disbursements through both repayments and interest.

“Just two and a half years ago, our financial system was on the brink of collapse and a bipartisan effort was conceived to stabilize the market,” Tim Massad, the acting assistant secretary for financial stability, said on Wednesday. “TARP fulfilled this mission and we’ve already been able to recover more than 75 percent of the taxpayers’ money in a very short time. No one predicted this positive outcome.”

Mr. Massad said in a conference call on Tuesday evening that the goal instead had been to maximize the value of those shares for taxpayers. The Treasury secretary, Timothy F. Geithner, conceded in a speech last month that the auto bailouts, which totaled about $63 billion, were likely to lose money.

Setting the parameters of the bigger stock sales requires a delicate balance. The Treasury Department is seeking to fetch a price high enough to avoid locking in big losses. But it is also eager to shed its holdings, since officials say that their task is not to act like a hedge fund or private equity investor.

The companies have also stressed a strong desire to reduce government ownership, arguing that the overhang has deterred private shareholders from investing.

“The more the government continues to own parts of these entities, the harder it is for these companies to get back to business as usual,” Anant Sundaram, a professor at the Tuck School of Business at Dartmouth, said. “Getting the corporate governance at these enterprises to back to as normal as can be is highly important.”

But several factors, many beyond the government’s control, may make breaking even difficult. As the markets have grown more volatile in recent weeks, pulling off a successful public offering has become more difficult.

Shares in A.I.G. had already fallen 49 percent this year before the re-I.P.O., requiring underwriters to walk a very fine line in finding a price acceptable to both Treasury and company officials and to potential incoming shareholders.

Compare that with G.M.’s offering, in which after months of frenzied meetings with investors, the federal government consented to both increasing the number of shares sold and their price.

Times have changed since then. Though the government’s lock-up period for selling G.M. shares expires soon, the Treasury Department is now likely to wait until mid-August or September to hold a secondary offering for the company’s stock, people with knowledge of the matter said previously. At the initial public offering price of $33, Treasury must now sell the remainder of its shares at an average of $53 to break even.

Some observers give Treasury the benefit of the doubt, pointing to the difficulties that private investors have in similar situations. On Wednesday, Freescale Semiconductor, a chip maker owned by a consortium of leveraged buyout firms, priced its initial offering at the bottom of an already reduced range amid slumping investor demand.

“I definitely give Treasury a solid B-plus,” Professor Sundaram said.

Article source: http://feeds.nytimes.com/click.phdo?i=46ff4314ed5cfff45c30be71c181eca6

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