Bailout Wonder: How the Government Turned a Profit on AIG

  • Share
  • Read Later

Remember the basket case that was AIG. The giant insurance company became known for everything that was wrong with Wall Street: unchecked risk-taking; complicated, unregulated derivatives; and, most importantly, huge, unearned bonuses.The cover of TIME carried the headline  “AIG = WMD.” In order to save the company the government had to pledge $182 billion. Not all of it was used, but the bailout effectively made AIG property of the U.S. government.  Worse, most predicted it would be years, perhaps a decade, before the government would be able to exit its “investment” in AIG.

That’s why yesterday’s news seemed like a big surprise. In its first public offering of shares since the bailout, which has been dubbed AIG’s re-IPO, the government actually turned a profit, about $40 million. The Treasury Department and the Obama administration have long been saying that bailout was a success. In its last public statement on TARP, the Treasury Department said that the program, which gave money to banks, insurers and auto companies at the height of the financial crisis and could have cost as much as $750 billion, will actually end up making tax payers money. The Treasury predicted a profit of $25 million. So does the AIG share sale finally mean TARP was a success? Not quite. Here’s why:

First of all, it’s important to point out how exactly the government was able to turn a profit on the AIG stock sale. It wasn’t by selling all of its shares. If it had, the government would have certainly lost money. Instead, the government sold a small sliver of what it owns of AIG – smaller than it thought it would be able to just a few months ago. Originally, the government planned to sell as much as $25 billion of its stake in AIG. But AIG’s shares, a few of which were publicly traded even before yesterday’s offering, have fallen 49% this year. So by the time yesterday’s offering came around, the government had to dramatically cut the size of its offering – down to $8.7 billion – for fear that any larger offering would cause AIG’s shares to tumble further. So while the government was able to turn a $40 million profit on the AIG shares that it sold, it didn’t actually turn a profit on AIG. To do that, it would have to sell its remaining $53 billion stake, which it could still lose a lot of money on.

The larger point is this: The government’s accounting of the bailout has always been very limited. The not-for-profit journalism group ProPublica has done as good a job as anyone of detailing how the government has done on TARP. The government ended up investing about $410 billion of the $750 billion. So far, the government has been paid back $260 billion and it has made a profit, in dividends and sales, of nearly $40 billion on that investment. But again, that doesn’t mean the government has made money on the bailout. When you take all that into account, the government is still out about $110 billion. Many of the banks that have been so far been unable to pay back the government won’t And that doesn’t even take into account the money that the government had to spend bailing out Fannie Mae and Freddie Mac. The government is still owed $138 billion on that bailout. A good portion of that money is surely gone.

Here’s what Washington Post blogger Ezra Klein recently said about TARP:

Watching “Too Big to Fail” is an excellent reminder of both what a plum-insane policy TARP was, and why a bunch of very not-insane people eventually coalesced around it.

The issue is that TARP was a one-size-fits-all for a time when we didn’t need a one-size-fits-all. Bank of America needed cash. Citigroup needed to be nationalized. J.P. Morgan and Goldman probably didn’t need anything. The problem with AIG is not that it was bankrupt, but that no one at the height of the financial crisis thought it would survive. It’s credit rating dropped forcing it to pay out on insurance contracts it couldn’t afford to satisfy. A guarantee from the government rather than bailout cash probably would have been enough to stop the company from failing. The real problem with the bailout in general was that it wasn’t flexible enough. TARP was the best one-size-fits-all. The beauty of it was that is could be passed with, well, two votes of Congress (the first TARP vote if you remember failed). And it definitely did make the financial crisis and the recession much less worse than it could have been. But was it the most successful bailout strategy we could have come up with? Probably not.

0 comments
Sort: Newest | Oldest