Recent Precedents of AIG and Ally Financial recapitalization plan provide template for future GSE recap plan

Recent Precedents of AIG and Ally Financial recapitalization plan provide template for future GSE recap plan. See Moelis report p.8, and 9 (Safety-and-Soundness-Blueprint)

AIG provides an excellent template of a large scale secondary share sale and government exit of a reluctant crisis-era investment. Treasury exercised its warrants receiving 79.9% of AIG’s common stock and converted its outstanding balance of preferred shares into additional common equity, before embarking on a series of well-timed and well-placed secondary share sales into the market. Treasury sold $51.6 billion of AIG common stock in secondary offerings in only two years, between January 2011 and December 2012. The conversion of the government’s AIG warrants and sale of AIG common stock was viewed by many market observers as an overwhelming success. By creating a dividend-yielding stock that would be attractive to conservative investors, the same can be achieved with Fannie Mae and
Freddie Mac.
American International Group Inc. (“AIG”) is a U.S. domiciled multinational insurance corporation formed in 1919 that nearly failed during the crisis, primarily due to losses arising out its Financial Products unit (“AIGFP”). As of September 2008, AIGFP had written approximately $440 billion in credit default swaps and created large, concentrated amount of systemic risk within the market. The federal government promptly intervened in order to protect AIGFP’s counterparties, which included some of the world’s largest financial institutions, and to stabilize the broader markets. In aggregate, the U.S. taxpayers’ overall support for AIG totaled approximately $182 billion. That figure includes nearly $70 billion that Treasury committed through TARP and $112 billion committed by the Federal Reserve Bank of New York (“FRBNY”).
On December 8, 2010, AIG announced that it had entered into a master transaction agreement with the Treasury and FRBNY to recapitalize AIG in a series of transactions in order to facilitate the government’s exit from ownership in the company. By this point, AIG had undergone a significant restructuring effort to de-risk the business and enable the company to fully repay taxpayers.
Between May 2011 and December 2012, AIG and Treasury conducted six public offerings of AIG common stock, selling a total of 1,655,037,962 shares (originally 92 percent of AIG’s outstanding common stock, representing Treasury’s full ownership stake after exercising its warrants and equitization of preferred shares) at an average price of $31.18 per share. Treasury’s $20.7 billion AIG common stock offering in September 2012, at that time, represented the largest single U.S. common stock offering in history. By March 2013, AIG had returned $205 billion to the U.S. Government, $22.7 billion in excess of the $182 billion provided by FRBNY and Treasury (a $17.7 billion positive return on the $112.5 billion provided by FRBNY, and a $5 billion positive return on the $69.8 billion provided by Treasury).

Ally Financial serves as another instructive precedent as it demonstrated the viability of a private sector capital raise via a primary offering (which was dilutive to the then outstanding Treasury ownership), followed by secondary offerings – proceeds of which were used to repay the funds advanced by the Treasury during the financial crisis.

Ally Financial (formerly known as General Motors Acceptance Corporation, or “GMAC”) was formed by General Motors in 1919, to act as a provider of financing to automotive customers. In 1985, GMAC expanded into the mortgage business. Twenty years later, in 2005, the company formed Residential Capital (“ResCap”) as a holding company for its mortgage originations. Mounting mortgage losses at ResCap during the financial crisis of 2007-2008 led the Treasury to invest approximately $16 billion in GMAC, effectively taking control of the company.
The Treasury took a series of steps to recapitalize the company. In 2009, GMAC announced plans to wind down its legacy mortgage risk and explore strategic alternatives for ResCap. GMAC issued mandatory convertible preferred membership interests (“MCP”) in May 2009, and trust preferred securities (“TruPS”) in December 2009 under TARP. Treasury converted its MCP interests into GMAC common stock. By the first quarter of 2010 the company had returned to profitability and GMAC was rebranded to Ally Financial (“Ally”).
In November 2013, as a precursor to its IPO, Ally paid Treasury a total of approximately $5.9 billion for the repurchase of preferred stock simultaneous with a private placement of approximately $1.3 billion of common stock, diluting Treasury’s common stock ownership stake from 73.8% to 63.5%. In order to attract new private capital, as part of the November 2013 transaction Treasury eliminated the anti-dilution ratchet on its warrants. In January 2014, Treasury sold approximately $3.0 billion of shares in Ally through a private placement transaction, reducing its ownership stake to 37.0%. In April of 2014, Treasury launched the IPO of Ally by selling $2.4 billion of its shares, further reducing its stake in Ally to 15.6%. Over the balance of 2014, Treasury sold off its remaining Ally Financial stake in a series of secondary market transactions. Ally ultimately returned $19.6 billion to the U.S. Government, $2.4 billion more than the original $17.2 billion invested.