The Bailout of AIG: Mission Accomplished?
If we do not act, boldly and immediately, we will replay the depression of the 1930s, only this time it will be far, far worse. We don’t do this now, we won’t have an economy on Monday.
Fed Chairman Ben Bernanke, “Too Big To Fail”.
On Friday September 14, the US government announced the completion of the sale of AIG stock taxpayers bought during the financial crisis bailout of the insurer. The government took in $20.7 billion for the sale and is no longer the majority owner of the company. At the peak of the crisis, taxpayers owned almost 80% of AIG.
Andrew Ross Sorkin, New York Times reporter, CNBC host, and author of “Too Big To Fail” used his DealBook column to ask former Special Inspector General of TARP Neil Barofsky if he was satisfied, finally. Sorkin says the US Treasury made a profit on the AIG transaction.
As we approach the four-year anniversary of the collapse of Lehman Brothers and the rescue of A.I.G. next week, sadly, much of the public — and people like Mr. Barofsky, as well-intentioned as he is — are still criticizing and debating the merits of the bailout. It’s almost become a cottage industry.
In his book, Mr. Barofsky wrote, “Treasury’s desperate attempt to bail out Wall Street was setting the country up for potentially catastrophic losses.”
As distasteful as the rescue effort was, it should be clear by now that without it, we faced an economic Armageddon. And the results thus far of bailing out the big banks, and A.I.G., indicate a profit.
Treasury never uses the term “profit” to describe what taxpayers would receive. The GAO did in a report in May when it estimated the proceeds that could be realized at various sale prices.
I wrote in American Banker about Sorkin’s claim that the bank bailouts prevented “financial system Armageddon” and his debate with Barofsky. I think “profit” is not only the wrong term but an answer to the wrong question.
It can never be proven that the crisis bailouts saved us from financial Armageddon. That’s the logical fallacy of asserting a claim with no way to disprove the opposite, so saying we made a profit on the deal is the next best thing. The New York Times’ Andrew Ross Sorkin claims, if you combine Treasury actions and “positive returns” on Federal Reserve activities, the Treasury is now “on a path to actually turn a profit.” That’s where the debate starts.
Former Special Inspector General for the Troubled Asset Relief Program Neil Barofsky says, “Not so fast.” I agree. If your intention is to try to prove or disprove the government PR claims that the taxpayer has made an accounting profit on any of the bailouts, or even broken even, you must remember this: That’s not why the government supposedly did what they did. And on the two counts of failing to unfreeze credit and failing to help homeowners – how the bailouts were justified to Congress – the government is guilty.
Treasury never uses the term “profit,” even in press releases. The term it does use, “positive return,” is a non-Generally Accepted Accounting Principles metric. Treasury has sunk to the level of a social commerce IPO like Groupon, whose infamous Consolidated Segment Operating Income (CSOI) – which was slammed by the Securities and Exchange Commission – glossed over losses to convince investors there was a gain instead.
“Yves Smith” at Naked Capitalism also points out that AIG enjoyed a tax benefit that negates Treasury’s claim. Who reported that deal? Andrew Ross Sorkin in February.
In a February article, “Bending the Tax Code, and Lifting A.I.G.’s Profit,” Sorkin described how AIG was allowed to retain $26.2 billion of net operating losses that should have been wiped out as a part of the rescue of the company as well as an additional $9 billion of “unrealized loss on investments.” That increased AIG’s fourth quarter and hence fiscal year earnings by a remarkable $17.7 billion, which dwarfs the mere $1.6 billion its operations produced that quarter. And the article includes this juicy bit:
Analysts at Bank of America and JPMorgan Chase last year estimated that the tax benefits from the losses propped up A.I.G. stock by $5 to $6 a share. Its shares closed at $28.66 on Monday, just shy of the $29 mark that the government says it needs to sell its shares to break even.
General Motors, another bailout “success story” – because saving GM supposedly averted a jobs and general economic disaster in Detroit – also benefited from the IRS rule change regarding retention of net operating loss carry forwards and “fresh start” accounting. I wrote about that in Forbes in November of 2010.
Reporting profits means new GM doesn’t lose the valuable deferred tax assets they carried over from old GM, thanks to a last minute fix from the US Treasury in September. The accountants can pull dollars from a cookie jar valuation allowance to prop up earnings when needed.
The IPO would probably have never passed even a minimal “smell test” by the SEC’s Division of Corporate Finance if ”fresh start accounting” hadn’t put millions in goodwill on their balance sheet. That gave GM a positive balance in shareholder’s equity. In a perverse example of accounting chicanery, the better GM does the less valuable that asset is.
Read the rest of my column about the AIG share sale at American Banker.
Another interesting angle to this story is former AIG Chairman Hank Greenberg’s lawsuit against the government for cheating him on his stake in the company when we bailed it out. There’s more info about this issue and the Treasury’s numbers at Dealbreaker. I can’t vouch for these numbers either but the analysis is intriguing.
I’ve written quite a bit about AIG, PwC its auditor, and the relationship between AIG and Goldman Sachs. You can search this site or buy my e-book which puts it all together in one place, in chronological order back to 2007.
Wasn’t a part of the GM bailout cost predicated on the avoidance of a PBGC assumption of liabilities in a normal chap 11. That Gov’t obligation doesn’t show up in the accounting because the bailout losses mask the perhaps greater losses that might have occurred from the PBGC assumption of the underfunded benefit accounts.