BUSINESS
10/22/2010 02:51 pm ET | Updated May 25, 2011

Taxpayer Investment Watch: AIG, Mortgage Bond Program Showing Positive Signs

In two tentative signs of hope that taxpayers will be repaid for the financial sector bailout, AIG used share sales to free up billions, and government investments in risky mortgage securities returned 36 percent. The news is good, just so long as it keeps moving in that direction.

AIG, the insurance giant that received a roughly $130 billion government bailout (with the ability to use up to $182.3 billion), raised $17.8 billion from selling shares in its Hong Kong insurance unit, Bloomberg reports, noting that the sale was the biggest stock offering in Hong Kong history.

As part of its recently hatched plan to repay taxpayers, AIG's first task is to repay the Federal Reserve Bank of New York. The sale of this Asian insurance unit, AIA, will go toward that roughly $19.3 billion debt to the Fed.

Earlier this month, Treasury's chief restructuring officer Jim Millstein told the New York Times he expected the AIA sale to bring in between $12 and $15 billion.

But a lot still has to go right for taxpayers to be made whole. Reuters' Felix Salmon has quibbled with NYT's Andrew Ross Sorkin over the likelihood of taxpayers earning a profit. To achieve success, AIG and the government must smoothly execute a massive stock conversion and gradual stock sale, the success of which is dependent on AIG's stock price.

Another government investment, controlled by the so-called Public-Private Investment Program, which was created last year to buy risky mortgage securities, has returned 36 percent during its first year, Bloomberg says. On its face, that's not half bad, especially considering it's close to the returns of the giant hedge fund Bridgewater Associates. The Wall Street Journal reported today that Bridgewater, which manages $86 billion, saw its flagship fund rise 38 percent in 2010.

But Jeffrey Phlegar, who runs one of the PPIP funds, gave a caveat. "Returns are not a function of better fundamental data," he told Bloomberg. Instead, they're a function of the behavior of investors in the bond market.

And that 36 percent figure, Bloomberg notes, is only on $18.6 billion, less than a fourth of Bridgewater's capital.