AIG said Wednesday it would sell most of its American General Finance consumer finance arm to Fortress Investment Group and take a $1.9B loss related to the sale.

Fortress paid a fraction of American General’s US$2.1B book value for the 80% stake.

AIG, which is majority owned by the US government, will retain 20 per cent of the company and expects to recoup much of the apparent loss through tax breaks.

For Fortress, the hedge fund and buy-out group, the deal represents a bold bet that traditional consumer lending will become a growth business, particularly following the passage of new financial regulations last month.

“This will be the golden era for consumer finance non-banks,” Wes Edens, the founder of Fortress, said in a interview. “Just buying a bank looks great on paper, but the opportunity is repositioning and recapitalizing other financial institutions.” Mr. Edens’ view runs counter to the thinking of many other investors, who see little opportunity in consumer finance as long as the securitization markets remain stalled.

Mr. Edens believes that banks are far too risk-averse when it comes to consumer lending.

New US consumer protection rules have put an end to the Payday lenders and sub-prime credit card issuers, and other big consumer lenders, such as HSBC’s Household arm, have retreated from the business.

Fortress believes this creates an opportunity to profit from providing basic loans to consumers. “This is back to the future. People will see what they are borrowing and what it costs,” Mr. Edens said. “It is far more transparent than the predatory practices that are the focus of the new consumer protection rules.”

Other big consumer lenders, such as HSBC’s Household arm, have retreated from the business. Fortress believes this creates an opportunity to profit from providing basic loans to consumers, and is unlikely to run foul of new consumer protection rules.

Mr. Edens said that a return to issuing simple secured debt on a company will prove profitable, in contrast to the heady days of a few years ago when most borrowing was off-balance sheet.

American General, which has 1,200 branches across the US and a minor presence in the UK, has US$20B in assets, US$18B in liabilities and a single-B credit rating. Its delinquency rate is about 9%.

Mr. Edens, who plans to personally to oversee the business, will to reduce the company’s borrowings and cut the cost of its debt. He has been aggressive in attempting to take advantage of opportunities in the wake of the financial crisis, as he did during the boom years by being the first alternative investment company to go public, in February 2007.—Paul A. Ebeling, Jnr. www.livetradingnews.com

Posted by Shayne Heffernan on Aug 12th, 2010and filed underEquities, Latest News, Markets, USA.You can follow any responses to this entry through theRSS 2.0You can leave a response by filling following comment form or trackback to this entry from your site