BUSINESS
12/11/2012 02:39 pm ET

Huge AIG Bailout Profit 'Misleading', Says Ex-TARP Watchdog

Merry Christmas, America, the U.S. government is about to close the books on its AIG bailout with a big profit. Please just ignore the immeasurable costs.

The Department of the Treasury said on Tuesday that it planned to sell its remaining 16 percent stake in American International Group for $7.6 billion, which by the department's count means taxpayers will turn a $22.7 billion profit on the $182 billion bailout.

The Treasury often tries to put the best spin possible on its bailout costs. And as night follows day, bailout watchdogs often disagree with the Treasury. Sure enough, Neil Barofsky, the former special inspector general of the government's bailout program for AIG, banks and automakers, known as the Troubled Asset Relief Program, warned that the department's AIG final profit tally relies on fancy accounting.

In an email to The Huffington Post, Barofsky called the government's profit estimate "misleading" because nearly a third of the AIG stock that the Treasury is selling came from the Federal Reserve, not from the Treasury's bailout program. What's more, Barofsky says, the taxpayer stands to lose money from a waiver it gave to AIG on billions in future tax payments.

But other than that, Barofsky conceded, the AIG bailout was not a disaster for the taxpayer profit-and-loss-wise.

A Treasury spokesman referred The Huffington Post to past statements by Barofsky in which he said a full accounting of the government's profit would have to include both Fed and Treasury investments in AIG.

Current Special Inspector General for the Troubled Asset Relief Program Christy Romero did not immediately take issue with the government's numbers, though her office has questioned the Treasury's bailout-profit claims in the past. A spokesman for her office said she would make a full accounting after the stock sales.

The real problems with AIG's bailout, both Romero and Barofsky agree, involve potentially massive future costs, from the terrible precedents the bailout set to the knotty regulatory questions that still have not been resolved more than four years later.

First, about those precedents: AIG's bailout involved full payouts to the "creditors" that helped drag AIG down in the first place, most prominently Goldman Sachs. That sent the message to banks to go ahead and take all the risks they liked, any losses would be covered by the taxpayer.

"Treasury's spiking of the football ... detracts from the massive moral hazard created when the government paid out AIG's counter parties ... at 100 cents on the dollar," Barofsky wrote to The Huffington Post, "making the government's backstop of certain financial institutions deemed too big to fail explicit and incentivizing in the future the exact same types of behavior that led to the last crisis and will almost certainly cause the next."

And though AIG's CEO lost his job, no individual at the company was ever accused of any wrongdoing for getting what was once the world's biggest insurance company into a hopeless financial morass. Joseph Cassano, who headed the company's financial products unit, was for a time kept on by the company as a consultant and paid $1 million per month. And the company just could not stop trying to pay huge bonuses to the employees of that division, even as it was being wound down. These same people had already raked in billions in bonuses even as they set AIG up for financial ruin.

Perhaps more importantly, there are lingering questions about how AIG will be regulated in the future. Amazingly, for years after the crisis, AIG had no regulator keeping an eye on its non-insurance financial activities. For now, the Fed is AIG's primary regulator because AIG owns a small bank. But AIG plans to sell that bank eventually, meaning it might once again be without a regulator.

At Romero's urging, the Financial Stability Oversight Council, a group of regulators including the Treasury and the Fed, is debating whether to declare AIG a "systemically important financial institution." Such a declaration would subject AIG to much tighter regulations, according to the Dodd-Frank financial reform law. Romero on Tuesday again warned regulators not to let AIG fall through the cracks.

“With Treasury’s sale of AIG stock, it is absolutely essential that regulators not forget how taxpayers ended up owning AIG," Romero said in an emailed statement. "As SIGTARP has reported and recommended, AIG’s financial business went unregulated for far too long. To protect taxpayers and our economy, regulators must learn lessons from the financial crisis and exercise the strongest level of regulation available over AIG.”

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