No end in sight for AIG payback saga

NEW YORK (CNNMoney.com) -- AIG suffered another setback in its effort to pay back the government this week, again calling into question whether the troubled insurer will ever be able to make good on the billions of dollars it owes U.S. taxpayers.

A large part of the company's plan to pay back the $83.5 billion of federal loans it owes involves selling non-core assets, including its Wall Street headquarters. That plan hit a snag over the weekend when Franklin Templeton Investments, the lead bidder for one of the insurer's asset-management units, dropped out of negotiations, according to a source with knowledge of the deal.

Franklin Templeton had been interested in purchasing AIG Investments, which managed roughly $85 billion in assets. The unit lost $4.5 billion last year.

Both AIG and Franklin Templeton declined to comment for this story.

The source noted that Franklin Templeton's dropping out may not impact the final price since it was just one of a consortium of bidders, the rest of whom are still in negotiations with AIG.

Offers have ranged anywhere from $300 million to $800 million, with the average bid coming in at $500 million, according to news reports. That's a paltry figure for part of a unit that was accustomed to generating billions of dollars of revenue annually.

$51.8 billion to go. Low investment valuations have pretty much been par for the course for AIG since its survival strategy began 10 months ago. A still-crunched credit environment has hurt AIG's chances at getting top dollar for many of its assets. Since its September bailout, AIG has sold or entered agreements to sell just 23 of its units for at least $6.7 billion (terms of 11 of the sales were not disclosed).

The company has ramped up its efforts. More than a third of the asset sales have taken place since mid-May, and the company has fast-tracked plans to sell stakes in three of its biggest insurance units later this year.

In April, AIG began the process of selling off a minority stake in its property and casualty businesses, called AIU Holdings. AIG did the same with its AIA Asian life insurance business and ALICO foreign life insurance unit last month.

The government will take a stake in AIA and ALICO by October, and in return, will forgive $25 billion of its loans to AIG. But combined with its announced sales, AIG still has $51.8 billion to go.

AIG Chairman and Chief Executive Edward Liddy said at the company's shareholders meeting in late June that there is "an excellent chance" the company will be able to repay the taxpayers. He stood by the timeframe of paying back the government in three to five years.

Analysts say that's wishful thinking, given poor market conditions and AIG's continued losses.

"It's a total disaster in terms of trying to figure out how AIG can earn enough within its timeframe to pay this back," said Andy Barile, chief executive of Andrew Barile Consulting Corp. "AIG keeps praying for a hard market."

The bonus obstacle. Liddy has said on many occasions that one of the chief obstacles to paying back the government is AIG's dedication of resources to the handling of its controversial bonuses. He argued that public outrage about bonuses, including hundreds of millions of dollars to financial products employees, has limited the company's ability to move forward with its plan to repay the government.

AIG found itself in the spotlight again last week, after it asked the Obama administration's pay czar to review more than $200 billion of bonuses it plans to pay out to employees and executives this year and next.

"All this stuff just hurts the government, because it makes people less likely to want to work there if they don't get their bonuses," said David Schiff, editor of the insurance industry publication Schiff's Insurance Observer. "It feels good to [complain], but doesn't save the taxpayers any money."

A company in transition. AIG's three trustees, who represent the government's near-80% controlling interest in the company, elected six new directors on behalf of the taxpayers last month. The directors include former board members of American Express (AXP, Fortune 500), Boeing (BA, Fortune 500), KPMG, Delphi, Sears (SHLD, Fortune 500) and Northwest Airlines (DAL, Fortune 500).

"Notice how a number of these guys are coming from troubled companies," said Stewart Johnson, portfolio manager at Philo Smith & Co. "Perhaps their experience at troubled companies will serve the board well in terms of trying to help AIG."

But others wonder if AIG's strategy will ultimately be self-defeating.

"Independent directors should be experienced in the insurance business, but can someone from Boeing explain compensation structure?" asked Andrew Barile, chief executive of Andrew Barile Consulting Corp. "These people are not going to bring value to the company."

Just three of the 11 directors that oversaw the company's downward spiral in September remained on AIG's board. Two directors, who were placed on the board after the company came undone, including Liddy, also stayed in place.

Liddy said in May that he planned to step down and one of the board's first tasks will be to find a replacement CEO and chairman. The roles are expected to be separated.