Snap Fact #190 - President Obama's AIG Bailout Settlement Plan Results In A Revived Company + A Net Gain to U.S. Taxpayers Of $Billions in Profit!

Post date: May 14, 2012 1:2:16 AM

Snap Fact #190

President Obama's AIG Bailout Settlement Plan Results In A Revived Company + A Net Gain to U.S. Taxpayers Of $Billions in Profit!

There appears to be a significant positive change in the scenario of the U.S. bailout of AIG (American International Group). After much gnashing of teeth and criticism of the President from both the left and the right, the GAO now forecasts that the government could end up with a $15.1-billion, profit from the bailout of this insurance giant. It is possible that this estimate of profit is quite conservative and the U.S. taxpayers may be in for an even bigger windfall. 

As you recall, the government made a commitment of approximately $180-billon in TARP loans to AIG during the financial crises of 2008 to avoid the collapse of the entire global financial system. AIG was the single largest beneficiary of government help from the TARP bailout and became a symbol of greed and excessive risk-taking on Wall Street. 

The unpopularity of the AIG bailout with the American public became exacerbated when a news release in 2009 indicated that AIG was awarding $165-million in bonuses to some of its executives. President Obama was outraged and instructed Treasury Secretary Geithner to seek every legal avenue to block these bonuses. Unfortunately, the bonuses could not be rescinded because of airtight contracts that were made with the executives in 2008. In spite of this, the newly installed CEO of AIG, Edward M. Liddy, told Congress that he had asked employees who received more than $100,000 in bonuses to return at least half and that some employees had decided on their own to return all of their bonuses to the company.

The loans to AIG were made during the Bush Administration, but the job of recovering these assets was left to the Obama Administration. By June 30th of 2010, AIG said that it then owed the government a balance of $101.2-billion as a result of repayments from sales of company assets as well as their non-use of some of the funds that had been made available to them. 

By the end of the 3rd quarter of 2010, AIG was meeting with its federal stakeholders, i.e., U.S. Treasury and the Federal Reserve Bank of New York, to discuss plans that would enable AIG to exit from government ownership. The exit strategy included conversion of shares held by the government into common stock shares that could be sold to investors. Treasury Secretary Geithner said at the time, “While there is a lot of work ahead to execute the terms of this agreement, we are much closer to seeing a clear path out.”

On January 14, 2011, the government and AIG announced a plan to end taxpayer involvement. As part of the plan, AIG paid back its $21-billion outstanding balance to the Federal Reserve Bank of New York. The U.S. Treasury Department would own a 92% stake in the company and would start to sell stock in the open market in March 2011. The government was to sell its stock over 2 years, as market conditions allowed. The government held 1.67 billion shares of AIG. Those shares were given to taxpayers at almost $30 per share. On January 14, 2011, those shares were trading at about $54 per share.

So it was not surprising to learn earlier this month (May 2012) that rather than lose money, U.S. taxpayers may actually profit from the bailout of AIG. While a $15.1-billion profit was estimated by the GAO, taxpayers would clear about $40-billion if the stock were sold at $54 per share. Congratulations are in order for the federal stakeholders, including President Obama, who not only negotiated a payback from AIG with a likely profit but leaves AIG again in a position to become a giant in the insurance industry.

So much for the myth that President Obama wants the Government to "take over" private business in this country. While the initial loan was made by the previous administration with no payback plan and no accountability, the Obama administration created a win/win scenario by which the huge insurance company was given a new lease on life and the government would see their loan repaid with substantial profits. In the end, capitalism has been served and all parties are better off.