Prolonged exit

Uncle Sam’s AIG exit: There's no quick way for the US government to exit American International Group. Converting $49 billion of preferred stock to common shares and selling them would, like the government’s exit from Citigroup , take a while. And that’s assuming other share sales, needed for separate repayments relating to AIG, go smoothly.

As of June 30, AIG owed the government just over $100 billion - though a further $4 billion has since been repaid. AIG has also made progress offloading assets. Big examples include the IPO of AIA, the Asian unit currently expected to debut on the Hong Kong market in the next month or so, and the $15.5 billion sale to MetLife of American Life Insurance, or Alico, which is winding its way towards closing. The New York Fed converted debt into preferred shares in these entities worth $16 billion and $9 billion, respectively, and the deals will help pay that off.

Back at AIG itself, there are around $49 billion of preferred shares owned by the Treasury. The Citi example shows how that block of prefs might be swapped into common equity and then sold, over time. In the Citi case, the government is turning a profit on its shares, potentially making the idea interesting for AIG as well. But it looks like selling the government's Citi stake - initially nearly 30 per cent - will take longer than the anticipated nine months from March. Offloading the Treasury's stake in AIG could take far longer, because the government already effectively owns 80 percent of the company, and converting the prefs could take that nearer to 90 per cent.

Unfortunately, that's not all. A planned sale of AIA to the UK's Prudential - abandoned in June - would have brought in a big slug of cash, but an IPO probably won't raise enough to pay back the New York Fed's preferred interest in AIA right away, let alone give AIG any proceeds to apply to its own obligations. Meanwhile the Alico sale will come with only $6.8 billion of cash. So the government will depend on further sales of AIA and MetLife equity interests to get its money back.

And there's more. Ahead of all that, at least in strict credit priority, is another $20 billion-odd, including accrued interest, that AIG still owes the New York Fed under a credit facility. The insurer might at some point be able to refinance that. But put the pieces together, and taxpayers could wait a long time before enough shares in enough different companies are sold for them to be made whole.