Feds Profit on AIG, but TARP Is Still a Loss

by Dan Burrows | August 7, 2012 1:12 pm

Good news for all us American taxpayers: We’re slowly but surely getting out of the too-big-too-fail insurance business, at what looks to be a profit.

The Treasury Department has been selling its stake in American International Group (NYSE:AIG[1]), the insurance giant it helped bail out during the financial crisis. Between the Treasury and the Federal Reserve, the U.S. government extended a lifeline to AIG for as much as $185 billion — and U.S. taxpayers wound up owning as much as 92% of the reckless financial firm at one point.

To its credit, AIG under CEO Bob Benmosche has been aggressive in selling off subsidiaries and assets, raising cash to pay back the federal government and buy back its own stock.

Late last week, the Treasury made its fourth sale of its AIG stake, selling stock worth $5 billion, of which AIG bought $3 billion. And on Monday, Wall Street underwriters of the sale — including more than 20 banks, brokers and advisers — picked up another $750 million in AIG, exercising an option they had on the Treasury’s latest move.

The upshot is that taxpayers now own 53% of AIG, down from 61% less than a week ago. True, the Treasury is still the majority shareholder, and it can’t sell shares again for at least 30 days, but it’s a far sight better than the 90%-plus stake taxpayers held at the height of AIG’s crisis, which effectively meant the firm was nationalized.

The Treasury said it made $300 million on the latest sale of AIG shares, and the insurer has already paid back the Federal Reserve, which booked a profit of $13 billion on the bailout.

Other instances of government backstopping haven’t been as remunerative, however. Washington extended a $50 billion bailout to General Motors (NYSE:GM[2]) and another $45 billion in tax breaks, and will still lose money on the deal in pretty much any scenario. (At least not counting the opportunity cost to the economy and related lost tax revenue had the government allowed GM to fail, with the enormous knock-on effects for suppliers and dealers.)

Additionally, as part of the GM rescue package, the government is still owed $12 billion from privately held Ally Financial[3], formerly the financing arm of GM known as GMAC.

Even just getting back to breakeven on the GM bailout isn’t looking too good, said Christy Romero, the special inspector general for the Troubled Asset Relief Program. The government watchdog told lawmakers last week that the Treasury needs a solid exit plan for its GM stake, and that it would likely take years for the government to get out of the stake in order to avoid a loss on the sales, which may not be possible.

Furthermore, despite the return taxpayers earned on AIG, the totality of the programs to bail out the banks and the U.S. auto industry are still running at a loss — and may never be in the black. As Romero wrote in her latest quarterly report to Congress, “It is a widely held misconception that TARP will make a profit.”

The most recent cost estimate for TARP is a loss of $60 billion, according to Romero, and taxpayers are still owed $118.5 billion, including $14 billion written off or otherwise lost.

But then the point of the bailout wasn’t to make money for the federal government — it was to prevent the collapse of the banking system, a deeper recession and even greater unemployment rates than we have now.

Financially, it hasn’t been a winner and probably never will be — but in its wider economic and social goals, the bailout was almost certainly a success.

As of the writing, Dan Burrows held none of the securities mentioned here.

  1. AIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=AIG
  2. GM: http://studio-5.financialcontent.com/investplace/quote?Symbol=GM
  3. owed $12 billion from privately held Ally Financial: https://investorplace.com/2012/08/what-does-warren-buffett-see-in-rescap/

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