Lehman Brothers filed for bankruptcy four years ago this week, plunging the global economy into chaos and triggering massive bailouts of the financial sector. Few bailouts were as controversial or scary as the government's rescue of AIG, which ultimately totaled $182 billion in multiple installments.
After selling 554 million shares of AIG on Monday -- the fifth such sale in the past 18 months — the U.S. Treasury Department has reduced its stake in the insurer to 22% from 92% in early 2011. More importantly, the Treasury says it has now turned a profit of $12.4 billion on the AIG bailout.
The Treasury's claim is somewhat controversial: Neil Barofsky, former TARP Special Inspector General, says the Treasury's cost basis on AIG is $43.53 a share, not the $28.73 cited by Treasury. (Monday's sale was at $32.50 per share.)
Barofsky is "technically correct that if you isolate the original cost to TARP for its investment in AIG," writes DealBook's Andrew Ross Sorkin. "But that conveniently excludes the huge stake that the Federal Reserve received in exchange for its original $85 billion rescue in September 2008. The Federal Reserve's stake was later rolled into the Treasury's stake through a series of complicated transactions."
On his Twitter feed, Barofsky concedes the "overall government position is in the black "but that "TARP remains in red."
While technically correct, most taxpayers don't distinguish between the Fed and Treasury or other government agencies and the bottom line is the AIG bailout turned out a lot better than many experts feared.
Certainly, that's something to be thankful for. But the true cost of the AIG rescue goes well beyond the government's cost basis on the shares. Any tally of the bailouts must include the high cost of moral hazard, the ongoing impact of the Fed's zero rate policy, as well as the loss of policymakers' credibility and the unresolved issue of having banks that truly are "too big to fail."
As you'll recall, much of the government's cash infusion went in the front door of AIG and out the back door to its counterparties, including Goldman Sachs, Bank of America/Merrill Lynch and Citigroup, which got paid 100 cents on the dollar for toxic assets. Along with a host of European banks, those firms made out a lot better on the AIG bailout than U.S. taxpayers ever will.
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