Bob's your Uncle

AIG/AIA: Uncle Sam can breathe a little easier. The agreed $35.5 billion purchase of AIA, American International Group’s Asian life insurer, by the UK’s Prudential is the biggest step yet towards repaying the massive pile of American taxpayers’ money used to bail out AIG.

Prudential will pay $25 billion in cash when the deal closes later this year. That means the New York Federal Reserve will retrieve not only $16 billion owed by AIA but a further $9 billion borrowed by AIG. The US insurer will also receive another $10.5 billion in Prudential securities and, as it sells them, those proceeds, too, will go to the government.

It’s a better deal for AIG and the government than the initial public offering of AIA that Robert Benmosche, the AIG boss, says was considered as an alternative.

Not only is the price most likely higher than an IPO would have achieved, the insurer manages a complete exit quickly.

Assuming nothing unexpected turns up to derail the deal, Benmosche is right in claiming the sale of AIA as the most significant milestone to date in AIG’s efforts to repay taxpayers. The government has nearly $100 billion still tied up in AIG directly; Prudential’s cash will reduce that by a quarter at a stroke.

AIG also has the sale of another unit, Alico, under discussion with MetLife. As part of that deal, $9 billion or more of bailout money could be repaid. Even then, though, the New York Fed and the Treasury would still have more than $60 billion to recover from AIG directly.

It’s no certainty that a trimmed-down AIG will manage to return that much cash in any reasonable timeframe, let alone hand taxpayers a deserved profit. For that to happen, AIG needs financial markets to stay relatively friendly. Nonetheless, the sale of AIA offers the first real evidence that maybe, just maybe, there’s light at the end of the bailout tunnel.