AIG pays back $4 billion of bailout debt

American International Group said Monday that it had used $4 billion from a recent debt sale to pay back the U.S. government, marking the single largest cash repayment so far from the bailed out insurance giant.

The money came from a $4.4 billion debt sale completed last week by AIG's massive aircraft leasing unit, International Lease Finance Corp. ILFC returned $3.95 billion to its parent company, which promptly used the proceeds to pay down outstanding loans from the Federal Reserve.

"This is continuing tangible evidence of AIG's progress in repaying the American taxpayers," chief executive Robert Benmosche said in a statement. "AIG is getting stronger every day. We still have more work to do, but we will finish the job and make sure we repay the American taxpayers."

The payment reduces AIG's outstanding balance on the Fed loans to about $21 billion, including interest and fees. If AIG fails to repay the loans in full, the Fed's losses will ultimately fall on taxpayers. The Fed also invested tens of billions of dollars more to help AIG rid itself of troubled derivatives contracts that were bleeding it dry.

In addition, the Treasury Department has pumped more than $40 billion into the company since September 2008 and given AIG access to an additional $30 billion, of which the company has tapped $7.5 billion.

AIG must repay a total of more than $90 billion before the company can regain its full independence. That's far less than the government committed to the company at the height of the financial crisis but still a significant hole.

"It's better than not paying it back. . . . It suggests things are moving in the right direction," said Morningstar analyst Bill Bergman. He said improvements in the housing and insurance markets had helped stabilize AIG in recent months, but it remains an open question whether the company can pay back its federal debt, and how quickly.

The federal government stepped in to rescue AIG with a massive bailout in September 2008. The company was teetering on bankruptcy, largely because of a mounting liquidity crunch caused by its faulty credit derivatives, and officials feared that AIG's failure could send shockwaves through the financial system. The result was a 79.9 percent government stake in the company and a bailout package that eventually would grow to more than $180 billion.

Even as AIG has made progress in paying down its federal debt, some efforts have proven frustrating. Earlier this year, for example, the company sold one of its major global insurance units to MetLife for $15.5 billion, a deal that is due to close by year's end and will help to further chip away at the company's federal debt.

At the same time, a planned $35 billion sale of AIG's American International Assurance subsidiary to Prudential fell through this year after Prudential demanded a lower price. AIG officials have said the unsuccessful deal opened up other options, and Benmosche said Monday that the company continues to "work diligently on the initial public offering" for AIA.

As the markets have stabilized and AIG has sold assets large and small, the company's financial fortunes have improved. In May, AIG posted first-quarter earnings of $1.5 billion, its third quarter in the black out of the last four. The result was a far cry from the $61.7 billion loss the company posted in the fourth quarter of 2008, bringing total losses for that year to nearly $100 billion.

The Government Accountability Office found this year that AIG's financial condition was "relatively stable" but pointed out that the company's future success depends on its ability to restructure effectively and on other factors beyond its control, such as the performance of the insurance and credit derivatives markets.

Monday's debt payment stoked optimism within AIG. Benmosche cited the improvements in AIG's insurance businesses and its stabilizing client retention rates as an indication of brighter days ahead.