UPDATE 3-White House slashes US bailout cost estimate

Thu Sep 30, 2010 7:35pm EDT

* White House sees TARP cost falling to less than $50 bln

* Gov't profit on AIG seen as high as $20 bln-Gibbs

* Treasury weighing options for selling stake-official (Recasts; adds details on Citigroup sales))

By David Lawder

WASHINGTON, Sept 30 (Reuters) - The U.S. financial bailout will cost less than $50 billion, the Obama administration said on Thursday, slashing a prior estimate by more than half on the back of a new plan to sell the government's stake in insurer American International Group (AIG.N).

Public anger that Wall Street was getting bailed out with a $700 billion fund at a time the United States was experiencing its deepest recession since the Great Depression has created a toxic political mix for lawmakers who supported the effort.

The administration has since tried to cast the bailout fund in a better light and Treasury Secretary Timothy Geithner said the overall cost of the so-called Troubled Asset Relief Program after assets were sold would almost certainly come in below $50 billion.

"The people who voted for that -- Republicans and Democrats -- deserve a lot of credit because that was a deeply difficult political decision for them ... and the returns on that program have been overwhelmingly positive for the economy and for the American people," Geithner said at a forum sponsored by the Atlantic magazine and the Aspen Institute.

White House spokesman Robert Gibbs told reporters the plan to convert the Treasury Department's stake in bailed out insurance giant AIG to common stock could reap a profit for taxpayers as high as $20 billion if it could all be sold at Thursday's market prices.

Gibbs said the bailout cost numbers are "likely only to improve" as the Treasury unwinds investments in recovering automakers General Motors Co [GM.UL] and Chrysler Group.

New investment authority under the TARP program expires on Sunday, exactly two years after the fund was created by Congress to try to stem a financial system meltdown.

The Obama administration has been eager to show that American taxpayers now stand a good chance of getting most of their money back. News of at least some profits from the program -- particularly on bailouts of companies most responsible for the financial crisis -- could help defuse voter anger as Nov. 2 congressional elections draw near.

In addition to the AIG move, the Treasury said it had earned a profit of $2.25 billion on the sale of Citigroup Inc (C.N) securities it received in exchange for a $5 billion guarantee on a portfolio of potentially toxic assets. The guarantee was canceled with no losses.

The Treasury also said it has now sold off $16.4 billion worth of Citigroup stock, reducing its stake in the banking giant to 12.4 percent -- a third of its size at the peak of the bailout.

But at a total cost of around $180 billion, AIG's multistage bailout by the Federal Reserve and Treasury in late 2008 and early 2009 was the most expensive corporate bailout.

It was also widely viewed as the most distasteful as a good chunk of the money was funneled directly to Wall Street and foreign banks.

Months later, AIG paid hundreds of millions of dollars in bonuses to employees of the unit that nearly caused its collapse. Controversy over the bailout led some members of Congress to call for Geithner's resignation.

NEW MATH

The Treasury Department had previously maintained a conservative estimate that it would lose $45 billion on the bailout of AIG, with overall TARP losses estimated at $101 billion out of some $390 billion invested. For a Factbox on TARP investments, see [ID:nN2947530]

Investments in automakers and funds spent on housing rescue efforts were also expected to lead to losses.

On Thursday afternoon, AIG shares ended up 4.4 percent at $39.10, a price that hangs an estimated $64.9 billion valuation on the government's 92.1 percent stake.

That would produce a gross profit of about $16.5 billion -- a more than $60 billion net swing in the Treasury's view of its investment.

The conversion, which is subject to successful sales and stock offerings for AIG's foreign assets and repayment of Federal Reserve loans, is being done to give the Treasury a more salable asset than the relatively illiquid preferred stock it received in the bailout.

The Treasury is still weighing options on how best to sell off the shares, a process that is not expected to start until 2011, according to a senior administration official.

These include a large secondary offering of shares, private placements with large institutional investors, a steady stream of sales in the market under a trading plan similar to that for government shares in Citi or combinations of all of these.