With Profit On AIG, US Should Buy More Troubled Banks

The Treasury Department says it will make a profit on the investment it made for taxpayers when it bailed out AIG. That leads to the question of whether the US government can make money by investing in other troubled banks, insurance firms, or car companies.  Remember, the government also is expected to profit from the GM IPO.

The Treasury will make money following the completion of an initial public offering for AIA Group Limited (AIA), the sale of American Life Insurance Company (ALICO) to MetLife Inc. and a $22 billion restructuring package which will go from the TARP to AIG.

The AIA IPO raised $20.5 billion of cash proceeds. The ALICO sale raised approximately $16.2 billion of total proceeds, approximately $7.2 billion of which is cash. This approximately $36.7 billion in aggregate proceeds will be used to fully repay the loan extended to AIG by the Federal Reserve Bank of New York (FRBNY) and a substantial amount of the FRBNY’s preferred interests in certain AIG subsidiaries

That does not make  taxpayers whole. As part of the restructuring, AIG will draw up to $22 billion in remaining TARP funds from Treasury to purchase the Federal Reserve Bank of New York’s preferred interests in the special purpose vehicles holding AIA and ALICO. Treasury will receive them.

After the restructuring, Treasury will own 92.1 percent of AIG, which equates to approximately 1.66 billion shares of common stock in the company. Based on the market closing price of AIG on October 29, 2010, these shares are worth approximately $69.5 billion.  This amount significantly exceeds Treasury’s current $47.5 billion cash investment in AIG.

As a result:

Based on current market prices and the value of the assets supporting the Federal Reserve Bank of New York ‘s loans to and preferred interests in AIG and Maiden Lane II and III, the US Government expects to earn a profit on its loans to and investments in AIG assuming the restructuring announced on September 30 is completed

The investment in AIG turned out alright.

Was it worth the risk? The answer is almost certainly “yes.” Some argue that companies such as Goldman Sachs Group benefited from the bailout and that the Federal Reserve should have made certain that other financial firms did not take advantage of Uncle Sam’s generosity. But, the collapse of AIG came on quickly, and the government had a matter of days to decide whether to save the insurer.

At that time, credit markets were nearly ruined by the demise of Bear Stearns and Lehman Bros.  Many other large American banks were in terrible trouble. AIG also had ties with countless banks and brokerage firms. It is no exaggeration to say that a collapse of AIG would have broken the back of the US financial system and have had repercussions around the world.

The taxpayers may make a profit on AIG, but, even if they did not, the alternative to the American economy would have been devastating if money from the average citizen had not been put on the line.

Douglas A. McIntyre