AIG: Government Sale Winner

NEW YORK ( TheStreet) -- American International Group ( AIG) was the winner among the largest U.S. financial names on Tuesday, with shares rising 6% to close at $35.26.

The broad indexes all saw 1% gains, as the Federal Reserve Open Market Committee began its two days of meetings, with investors expecting the central bank to announce on Wednesday plans to continue its large monthly purchases of long-term U.S. Treasury securities, as the central bank works to keep long-term rates at historically low levels.

While the Fed is expected to continue is purchases of long-term Treasuries at a pace of $45 billion per month, however, there could be some upward pressure on short-term interest rates if, as expected, the central bank stocks making equal monthly purchases of short-term Treasuries in 2013.

Investors also cheered the announcement by the Center for European Economic Research that the ZEW economic sentiment indicator for Germany rose to 6.9 points in December, increasing from the previous level of negative 15.7, for the indicator's first positive number since May.

The Center for European Economic Research said that "the indicator's rise shows that the financial market experts expect the economic activity to stabilize until early summer 2013," and that "positive U.S. economic data may have contributed to this assessment."

Financial stocks trailed the broad indexes, with the KBW Bank Index ( I:BKX) up slightly to close at 49.51, while the KBW Insurance Index was flat, at 126.99.

Shares of HSBC ( HBC) rose 1% to close at $51.84, after the bank reached an agreement with the Department of Justice and U.S. regulators to pay a whopping $1.9 billion to settle charges that it facilitated illegal transfers to Iran and the laundering of money by Mexican drug cartels.

The deal included a deferred prosecution agreement with the Justice Department, under which HSBC will be "subject to strict oversight by a corporate monitor for the next five years," according to Assistant Attorney General Lanny Breuer, who also said during a press conference that HSBC "must further enhance its compliance structure."

HSBC CEO Stuart Gulliver said in a company statement that "we accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organization from the one that made those mistakes."

Gulliver added that "under new senior leadership, we have been taking concrete steps to put right what went wrong and to participate actively with government authorities in bringing to light and addressing these matters."

'You Did It'


The U.S. Treasury late on Monday announced a public offering for its remaining 16% stake in American International Group's common shares, with the shares selling for $32.50, which was a 3% discount to Monday's closing price.

After bailouts and commitments by the U.S. government and the Federal Reserve totaling $182 billion in 2008 and 2009, AIG finished repaying the Federal Reserve earlier this year, and the only remaining government investment in AIG is the Series D warrant to purchase up to 2,689,938 AIG shares for a price of $50 a share, that was issued on Nov. 25, 2008, with a term of 10 years. The Treasury also holds the Series F warrant, allowing the government to buy up to 150 AIG shares for a very small price.

The timing of the Treasury's announcement was no surprise to Sterne Agee analyst John Nadel, who said in a report on Tuesday that he "had expected the announcement of estimated losses from Sandy was the critical factor in getting UST out of the stock."

AIG on Friday announced that its early estimate of losses from Hurricane Sandy was $2.0 billion, net of reinsurance, or $1.3 billion after taxes. The company also said it expected to contribute $1 billion in capital to its AIG Property Casualty unit, after the unit had paid $2.4 billion in dividends to the holding company through the first three quarters of 2012.

Then on Monday the company announced a deal to sell "up to a 90% stake in International Lease Finance Corporation (ILFC), a non-core asset," to an investor group led by Weng Xianding, chairman of New China Trust Co. Ltd. for roughly $4.75 billion.

AIG CEO Robert Benmosche credited the company's employees with achieving "one of the most extraordinary - and what many believed to be the most unlikely - turnarounds in American business history," saying in an internal memo that "you did it."

While AIG is now free from the extra scrutiny that goes with having the government as its major shareholder, it is now regulated by the Federal Reserve at the holding company level, as a "global systemically important financial institution," and will be subject to the regulator's annual stress tests, making it appear unlikely that the company will repeat the derivative trading mistakes that necessitated the company's bailout through the Troubled Assets Relief Program, or TARP.

But AIG will lose what some analysts have called an advantage in pricing its insurance products and gaining market share, because of the government banking. The company also trailed its major property and casualty insurance competitors in underwriting profitability, even before Hurricane Sandy hit the Northeast.

But analysts are generally positive on the company's prospects, as 14 out of 22 analysts polled by Thomson Reuters rate AIG's shares a "Buy," while the remaining analysts all have neutral ratings.

Nadel rates AIG a "Buy," with a price target of $40.00 and estimates the company will earn $3.20 a share in 2013, with EPS increasing to $3.75 in 2014.

AIG's shares have now returned 52% year-to-date, following a 52% decline during 2011. The shares trade for 10 times the consensus 2013 EPS estimate of $3.49, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is four dollars.

AIG Chart AIG data by YCharts

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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