Five Bold 2010 Predictions for Financial Stocks

NEW YORK (TheStreet) -- Financial stocks endured a difficult 2009. Who would have predicted, last December, that the sector would have sunk to generational lows in March, endured the government stress tests in June and then seen share prices rebound, allowing many companies to repay bailout money later in the year? Our fearless forecasters offer five possibilities for 2010 -- some of them unlikely, but all of them possible, and sure to be fodder for debate at your next holiday party.

What if the Government Turns a Profit on AIG?

Now that Bank of America has repaid its bailout investment, and even Citigroup is making headway in that direction, it's worth asking the bold question of whether taxpayers might get their money back from American International Group(AIG) next year.

Short answer: The outcome - while highly unlikely - isn't entirely impossible.

AIG owes a hefty chunk of change, and the Treasury Department predicts it will lose $30.4 billion on its AIG investments. But since CEO Bob Benmosche has taken the helm, the insurer has been making significant headway, which is expected to continue into 2010.

Of the $180 billion in taxpayer support connected to AIG, $70 billion in loan principal still needs to be paid back. AIG also owes quite a bit in dividends and interest, though the total amount is unclear. (AIG didn't respond to a request for those figures in time for publication.)

In November, AIG extinguished $25 billion worth of debt by issuing preferred stakes in subsidiaries that are being prepared for spin-offs or sales. It has also generated $5.6 billion in cash through dozens of asset sales that will be used to pay down balances further. There are plenty of other businesses on the chopping block, and Benmosche has indicated that he will be patient and sell or spin them off only when the price is right.

Of course taxpayers also need to consider two AIG-related vehicles sitting on the Federal Reserve's balance sheet. Maiden Lane II and III house $36.7 billion worth of assets once owned by AIG that are mainly backed by residential real estate.

The bailout inspector general, SIGTARP, has said it's "difficult to assess the true costs" of Fed actions, and that "full recovery [of taxpayer investment] is far from certain." But while the Maiden Lane assets were once labeled toxic, they actually haven't fared so poorly.

The entities have repaid $7.1 billion in Fed loans since their creation in October 2008, including interest and fees. The fair value of their assets has improved by $10.7 billion. If the Fed sold all of them in the market today, they'd be worth $3 billion more than remaining loans. If the Fed holds onto the assets as the economic recovery moves forward, taxpayers might earn even more.

The insurer would have to raise quite a bit more through earnings, asset sales or capital raises to repay what it owes the government. It would also need to extinguish another $61.8 billion in untapped federal credit lines that exist in case of emergency. Perhaps most importantly, it would need to prove its financial stability to regulators, while continuing to unwind more than $1 trillion worth of derivatives and whittling itself down to mainly a core property and casualty business.

Achieving that over the next 12 months would certainly be bold. But given AIG's progress so far - including two consecutive quarters of profit for the first time since 2007 - it seems as though a bailout repayment is possible, and may occur sooner than initially expected.

Written by Lauren Tara LaCapra in New York.

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