AIG repayment prospects fade

NEW YORK (CNNMoney.com) -- Taxpayers have lent AIG $132.6 billion, but getting that money back is looking less likely.

The sale of AIG's Asian life insurance unit for more than $35 billion would have helped a lot, but the deal went bust this week when the buyer, Prudential PLC, sought a lower price.

Now the troubled insurer is essentially back to square one with its repayment strategy -- though AIG Chief Executive Robert Benmosche remains upbeat about the options regarding AIA, and maintains that AIG will pay back its loans in full.

The AIG (AIG, Fortune 500) bailout came from three main sources.

First, there was $52 billion in loans from the Federal Reserve Bank of New York. The plan was to pay back the New York Fed with proceeds from the AIA sale and the planned $15.5 billion sale to MetLife (MET, Fortune 500) of another life insurance unit named Alico.

Now AIG will likely try to sell AIA through an initial public offering, though given the recent market turmoil, it probably will generate less for AIG than the Prudential deal would have.

AIG also got a bailout from the Treasury Department, in the form of an ownership stake that can be converted into about 80% of AIG's common shares, and a $49.1 billion stake in the company's private shares.

Currently, AIG has no precise plan to repay the Treasury. The company said it planned on paying back the New York Fed first, then repay its remaining loans with profits.

But paying back the Treasury loan with profits alone does not appear feasible: Benmosche has predicted that AIG will be able to earn between $6 billion and $8 billion after taxes next year. Even if AIG maintained that income level for years and sent all of its profit to the government, it would take until 2018 to fully repay the Treasury.

"The recovery [of Treasury's] interest will largely depend on the performance of the remaining businesses in the AIG portfolio after it completes its asset sales and how they are valued in the stock market," said Jim Millstein, Treasury's chief restructuring officer, at a bailout watchdog's hearing on AIG last week. "It remains unclear what the Treasury's ultimate recovery will be."

The Treasury has the option of selling its 80% stake in AIG on the stock market, but a Treasury official said that wouldn't likely result in taxpayers getting all of their money back. The government's interest is currently worth roughly $20 billion, but Treasury noted that a massive sale of AIG's stock would lower the share price, resulting in a lower sum.

Meanwhile, AIG has not paid the dividend on its TARP loan for six consecutive quarters, resulting in about $5 billion of lost payments. According to its deal with Treasury, AIG does not need to make up for missed dividend payments. Instead, the government can assign two new board directors after four consecutive skipped payments -- a right that Treasury only recently took advantage of in April.

If there is any good news for taxpayers, it comes from the third bailout source: Asset purchases by the Federal Reserve.

In 2008, the Fed bought up assets from AIG's business partners to free the insurer from having to continually post collateral on the assets as they plummeted in value. The Fed spent $31.5 billion on the assets, which it put into two new companies called Maiden Lane II and Maiden Lane III.

AIG does not owe that money to the Fed. Rather, the Fed plans on selling the assets for a profit as their market value increases. According to the Fed, those assets are now worth $39.2 billion. If the government were to sell them today, those Maiden Lane assets would yield a profit of $7.7 billion.