It's been a big week in Bailout Nation: On Tuesday, AIG and the U.S. Treasury sold $8.7 billion of stock, reducing the government's stake, while Chrysler repaid $7.6 billion of loans to the U.S. and Canadian governments -- six years ahead of its deadline.
The events are going to fuel the idea that the government is "turning a profit" on the big bailouts of 2008. Tim Geithner and Ben Bernanke might like us to believe that, but saying "the losses weren't as great as feared" is far more accurate.
Take AIG (please!). Tuesday's sale netted the Treasury a profit of roughly $54 million and reduced the government's stake in the failed insurer to 77% from 92%. In sum, the U.S. government remains the majority shareholder in AIG and has recouped only a fraction of the $182 billion in taxpayer-funded bailout funds. Adding injury to insult, the government left a lot of money on the table by waiting to sell its shares in AIG, which have fallen about 40% since the insurer repaid its loans to the Federal Reserve earlier this year. (Why did the privately-own Fed get paid back before Uncle Sam? Do you really have to ask?)
Meanwhile, the Federal Reserve continues to bail out the banks with its zero-rate policy and recently changed its accounting rules to essentially put the Treasury — a.k.a. the U.S. taxpayer — on the hook for any future losses on the nearly $3 trillion of toxic debt stuffed into its balance sheet. And, don't forget, the U.S. government has written Fannie Mae and Freddie Mac a blank check that doesn't expire until the end 2012 — a.k.a. after the election -- on the GSEs' approximated $5 trillion worth of mortgage-backed liabilities.
Although many Americans found it offensive, the bailout of Chrysler (and GM) looks a lot better in comparison. While the Obama administration used a heavy hand with bondholders and arguably enriched its political patrons -- a.k.a. organized labor -- the reality is American manufacturing jobs were saved and the U.S. auto industry appears to have found its footing.
As Henry and I discuss in the accompanying video, the developments at AIG and Chrysler this week show (yet again) how restructuring via a government-mandated bankruptcy is hands down a lesser evil than taxpayer-funded bailouts, especially those given with no strings attached.
- Fannie Mae and Freddie Mac
- Tim Geithner
- Ben Bernanke
- balance sheet
- the Federal Reserve