AIG bailout not a free lunch
James Tilson and Robert E. Prasch follow the money at New Economic Perspectives regarding the AIG bailout and a more accurate sense of costs.
“If it’s too good to be true, it probably is.” This old adage came to mind on December 11, 2012 when the U.S. Treasury made the announcement, reiterated unthinkingly by the press, that the AIG bailout was coming to an end with American taxpayers making a tidy profit on the deal. In an effort to capitalize on the news, AIG has spent millions of dollars on a primetime ad campaign thanking America for the bailout, highlighting its success: “We’ve repaid every dollar America lent us. Everything, plus a profit of more than 22 billion.” Unfortunately, this cleverly designed public relations maneuver deceives the taxpayer by distorting the perception of what has been a contentious use of government funds.
Among the shares the Treasury sold were 562,868,096 gifted to them from the Credit Facility Trust. This trust had previously been established by thehtFederal Reserve Bank of New York for the sole benefit of the Treasury Department. When these shares are taken into account, only 65.99% of the total returns from the Treasury’s sale of AIG common stock can be attributed to its original TARP investment, and the remainder should be credited to the FRBNY. The Treasury’s calculation, however, does not adjust for this transfer of shares. The effect is to artificially boost the returns on its politically contentious TARP investment at the expense of the Federal Reserve. Not counting these gifted shares, the Treasury assumes a break-even price of $28.73, but if we examine its investment in isolation, the true break-even is $45.53. After adjusting all cash flows associated with sale of stock, the Treasury’s profit of $5 billion becomes a loss of $12.7 billion.
An accurate evaluation of the Treasury’s investment in AIG should incorporate the effects of this tax advantage. So, rather than an average sale price of $31.18, a more telling number would be the share price controlling for this preferential tax treatment. According to estimates by analysts at Bank of America and JPMorgan Chase, doing so would reduce AIG’s share price by $5 to $6 dollars a share. ( ) If we were to adjust the sale price by $6 per share, the Treasury’s return is reduced from nearly $5 billion to a loss of more than $5 billion. Compounding this adjustment with that from the shares gifted by the Federal Reserve described above, the Treasury’s return is further reduced to become more than a $19 billion loss.