2010   Financial Report of the United States Government

Notes to the Financial Statements

Note 6. Beneficial Interest in Trust

Under the initial terms of a credit facility agreement with AIG and the FRBNY, a 77.9 percent equity interest in AIG (in the form of Series C Convertible Participating Serial Preferred Stock convertible into approximately 77.9 percent of the issued and outstanding shares of common stock) was issued to a trust established by the FRBNY. Subsequent to the initial agreement, a reverse stock split of AIGís common stock increased this to 79.8 percent. The Government is the sole beneficiary of that trust, so that when the stock is ultimately liquidated the proceeds will be deposited into the General Fund of the U. S. Treasury. The Government will be the ultimate recipient of any dividends on the stock and any proceeds from the liquidation of the stock. The accounting and reporting for any activities related to the Governmentís beneficial interest in the stock held by the trust will be done by Treasury. The trustees of the trust are independent of both Treasury and the FRBNY, and are not involved in day-to-day management of AIG.

As the Government is the sole beneficiary of the trust, it is anticipated that the Government will ultimately realize an economic benefit from its beneficial interest in the trust. The $23.5 billion value recorded is based on the market value of the trustís AIG holdings on September 30, 2009; as the underlying AIG common stock is actively traded on the New York Stock Exchange, this represents the best independent valuation available for the Governmentís beneficial interest. As of September 30, 2010, the underlying market value of the trustís AIG holdings had declined by approximately $2.7 billion to $20.8 billion. The carrying value of the beneficial interest in the trust was reduced by this amount, and a corresponding expense recorded on the Statement of Net Cost.

The Governmentís proceeds will be received when AIGís credit line with the FRBNY is terminated, AIG has redeemed the preferred stock owned by Treasury through TARP, and the trustees sell the stock held by the trust. The Government will re-value its beneficial interest in the trust each year until the trust is liquidated. Like any asset, future events may increase or decrease the value of the Governmentís interest in the trust.

Treasuryís participation in enhancing AIGís capital and liquidity in order to facilitate an orderly restructuring of the company is in addition to the FRBNY activities in this regard.

On September 30, 2010, Treasury, the FRBNY, and AIG announced plans for a restructuring of the Federal Governmentís investments in AIG. The AIG Recapitalization agreement is intended to convert the trustís preferred stock into common stock that will be transferred to Treasury, as custodian for the U.S. Government, upon the closing of the restructuring. Under this agreement, it is anticipated that Treasury would sell its shares in the open market over time. This planned conversion of the trustís preferred stock into common stock and distribution of such stock to Treasury in conjunction with the conversion of TARPís AIG preferred stock into AIG common stock, would result in Treasury holding 92 percent of AIGís common stock, with the TARP holding approximately 61 percent of such amount. Actual execution of the recapitalization agreement is contingent on numerous material conditions being satisfied prior to the closing of the agreement. If the closing does not occur on or prior to March 15, 2011, any one of AIG, the FRBNY, or Treasury may terminate the agreement. On December 8, 2010, the parties entered into a master transaction agreement that supersedes, but does not represent a material departure from, the terms contained in the September 30 AIG restructuring agreement.

Last Updated:  December 07, 2011