Will Taxpayers Turn A Profit On The AIG Bailout? Not So Fast

As AIG and the government hammered out a plan last week to repay taxpayers for the bailout worth up to $182.3 billion, the U.S. Treasury reckoned the total cost would be less than $50 billion, and it might even turn a profit, the New York Times reported.

But the specifics of the paydown, which will involve settling obligations to the New York Federal Reserve and to the Treasury, have raised questions about the insurer's ability to make good. NYT's Andrew Ross Sorkin argues in his DealBook column this week that in a best case scenario, AIG could repay its debt in full and even leave the government with a $13 billion profit.

To make the calculation, Sorkin starts with the rounded number of $130 billion (since the government never actually ended up using the full $182.3 billion). Subtracting the revenue from assets that AIG will sell -- and other assets that the government could sell -- whittles that down to $71 billion. To reduce that further, Sorkin says, AIG will use money it's borrowed from the Treasury to repay the Fed, a move he admits is akin to "moving money from one hand to another."

Reuters' Felix Salmon takes issue with that step in Sorkin's logic: As Sorkin admits, taking money from one government body and giving it to another doesn't constitute repaying debt. But Salmon offers an explanation. He refers to the AIG press release and concludes that AIG will raise the money to complete the transaction by selling securities that the New York Fed now owns.

The real contention comes next. Sorkin says AIG will, at that point, owe the government $49 billion, which it will repay as the government converts its preferred shares in the company to common stock. Such a move would increase the government's stake in AIG to a whopping 92 percent, would dilute private shareholders, and increase the value of the government's stake to $62 billion. It would win, Sorkin says, a $13 billion profit.

But Salmon begs to differ. His argument, essentially, is that Sorkin neglects to consider the original value of the government's stake in equity, which, if the company is currently worth $26 billion and the government currently owns 80 percent of that, is about $21 billion. The value of that stake increases only $41 billion in the conversion plan. But that $41 billion is still $8 billion short of the target. Or, put another way, the government will start with $49 billion in debt plus $21 billion in equity (for a total $71 billion stake) and end up with only $62 billion in equity.

Both opinions, it should be noted, are speculation. Any number of variables, such as the behavior of private shareholders, could change the game entirely. According to the plan, the stock conversion will happen in early 2011, after the debts to the New York Fed have been repaid.

Comments

[bohemiangrooves]

02:33 PM on 10/06/2010

this is such bull. the government cannot technically make "profits". If there is an extra billion that comes in it does not transfer to an immediate addition to stimulus or an immediate reduction in your taxes. This is a non-story, except to say that TARP could have been reworked so that the fed simply backstopped obligations rather than bought assets. The asset purchase comes across as deficit spending and thereby makes it politically harder for the govt to spend real stimulus dollars on people.

[tangolas]

02:20 AM on 10/06/2010

AHHHHHHHHHA!HA!HA!HA!HA!HA!HA!HA!HA!HA!HA!HA!HA!HA!HA!HA!HA!HA!

[Mike Tartaglia]

03:40 PM on 10/05/2010

it's all monopoly money to AIG anyway

[Marcelo Munoz]

03:37 PM on 10/05/2010

Will Taxpayers Turn A Profit On The AIG Bailout? LOL!!!

[dizmo4]

02:51 PM on 10/05/2010

The point isn't whether the end result is going to turn a profit or not.

The point is that TARP cost the country far less than the $700 billion.   If at the end of the whole fiasco, the tax payers lose $50-60 billion,  that is a hell of a lot better than losing $700bn.

The fact that there's a potential to even make a profit, demonstrates that as flawed as the program was in concept and implementation , it wasn't the complete disaster that many people believe.

[Jupitersky]

03:39 PM on 10/05/2010

Really? The point to me is that tax payers have to support the wealthy financial corporations in the first place. How much of that money went directly to compensation to the people that caused the problem? AIG owed billions to Goldman JP Morgan Chase and others that were paid 100% of their debt- then turned around and paid massive bonuses with it- as if they earned it. The CEO of AIG- what was his golden parachute worth?? If the company is bankrupt where does that money come from to pay him and how did he earn it?

[MrUnlimited]

09:14 PM on 10/05/2010

Co-signed. TARP was still a complete disaster. It perpetuated a culture of moral hazard by bailing out the people most responsible for destabilizing the economy.

[leeskyblue]

09:35 PM on 10/05/2010

And on top of that, does anyone here understand how much was loaned and how much is owed? "might even make a profit?" -- the above description sounds like gibberish covered by our government's supposedly endless supply of dollars,

[Marcelo Munoz]

03:39 PM on 10/05/2010

The 700,000,000,000.00 is the equivalent of devaluing our currency by 700,000,000,000.00

have you seen the price of gold lately?

http://www.kitco.com/charts/livegold.html

[TheAntitheist]

04:38 PM on 10/05/2010

So you suggest we did what? Tied our currency down to the gold standard?

[bohemiangrooves]

02:41 PM on 10/06/2010

technically, what you just said was gibberish. the money would have been transferred into various inst. accounts at the fed. It would not have been a stimulus like you are suggesting. The only way the currency can devalue is if the money goes directly into spender pockets. Oh, and there's 10% (and then some) unemployment, so the demand push is far greater than the supply push so any huge outlay of government spending has lots of room before inflation and currency devaluation sets in.

[novo organon]

11:35 AM on 10/05/2010

I was never a fan of neo-liberal economic policies, which impoverish the middle class and poor. Though my heart bleeds for the struggling masses who yearn for a better life but are constrained due to capital and propaganda controls. Unfettered freemarket and unfettered capitalism is like letting a child loose with no adult supervision in a candy store. It must tempered with rational, mature and enlightened business leaders who have not only vision for themselves but vision for the greater society as a whole.  

[cassie reinara]

10:56 AM on 10/05/2010

Another spin article. Making profit from investing in a bankrupt company....please!!!! They really think most people are dumb or not paying attention.

[hswanson2]

10:27 AM on 10/05/2010

None of which factors in the fact these shares will have to be sold - and will people want to buy. Right now the share price is propped up by the fact this is a TBTF institution that will not go out of business because the government owns it - as it sells off its assets and that changes people might realize they are holding paper from a zombie corporation.

[MrUnlimited]

09:18 PM on 10/05/2010

Agreed, but Andrew Sorkin gets paid to sell BS stories about how TARP was a success so I don't expect anything remotely resembling integrity from him.