The US Treasury has completed it's sale of AIG shares, which it took as part of it's bailout of the insurance firm during the financial crisis. $183B was given to AIG in the bailout, and $205B returned. Overall, TARP put out $418B and has returned $380B, putting the cost of the economy-saving bailout at $38B and failing.
It seems reasonable to describe TARP as a bargain, even if not another single dollar comes in from TARP repayments.
Let's not forget the cost of letting companies know they're effectively free of the consequences that keeps capitalism in check.
Let's not forget the cost of letting companies know they're effectively free of the consequences that keeps capitalism in check.
Indeed. Also, I don't believe this article is entirely true. They may not own common stock, but part of how they got there is by throwing money at many of the counter parties to AIG's "insurance". My understanding is that the FED has been swapping good money for toxic debt the entire time. So someone has taken on that risk. And it isn't the shareholders of AIG or the banks.
A different perspective. Some highlights:
Barofsky's claim that TARP suffered a loss with the lower sale price is technically accurate. TARP originally invested in AIG through preferred stock, which it told Congress had a value of $43.53 per share. But AIG's rescue, which began in 2008 with an $85 billion Federal Reserve loan, has been through multiple restructurings, each of which changed the value and makeup of the government's stake.AIG ultimately repaid the Fed's loan, and Treasury exchanged its preferred shares for 1.655 billion new shares of AIG common stock valued at $47.5 billion. That changed the equation, bringing Treasury's break-even price down to $28.73.
Why the discrepancy? When Treasury exchanged its preferred shares, it received about 563 million new shares from the Fed. Those shares are held outside the auspices of TARP.
Barofksy says he's never been critical of the AIG restructuring but has questioned Treasury's portrayal of its return on the investment. "If you include what is essentially a gift from the Federal Reserve it comes up in the black," he says. But the question "is whether or not the description of this as a Treasury investment is a fair or misleading characterization."It's still too early to say whether U.S. taxpayers will ultimately break even on the AIG bailout. The U.S. Treasury still owns about 70 percent of the firm and it will take a year, if not more, to reduce that amount to zero.
Emphasis mine. This is simply the Fed obfuscating the actual cost of the bailout by playing a shell game, repaying the TARP bailouts from other government sources.
No, the US government temporarily surrendered its shares in AIG. The backstop is still there, and when AIG blows itself up again, Uncle Sam will be there with freshly-printed dollar bills in hand.
Note that when you total up the money, there's a surplus.
Yes - because when you conjure money out of thin air, it's easy to show a surplus.
The government did not buy back the shares itself, so there's no way it could have somehow "obfuscated" by buying them. Instead, it sold them on the market, and made money.
You're right - it simply created the shares it needed to sell:
The Treasury, to put it mildly, disagrees with Barofsky's assessment of the math. To the government, the TARP math is irrelevant, since the new shares from the recapitalization had zero cost, and therefore lowered the Treasury's cost basis in the stock dramatically to the $28.73 figure.
Wow, how exactly does one acquire shares at zero cost?
And that completely ignores the Fed shenanigans with Maiden Lane II and Maiden Lane III, which were used to pump money into AIG by buying toxic assets at face value (i.e., ridiculously over-valued). Those assets were later resold, after having had their value magically re-inflated, to ... the same big banks the Fed bailed out! Isn't it truly amazing how you can make a profit when you're working both sides of the deal?
I think what he's worrying about is that this is a lie. The truth is usually worse than the lie , so we're hosed financially.
That would be a nice, neat story ... but a stock split is not what happened.
In fact, AIG performed a 1-to-20 reverse stock split in 2009.
When the recapitalization occurred in 2010, 100,000 preferred shares that had been created specifically for the Fed (the AIG Credit Facility Trust) and purchased for virtually nothing were converted into 563 million common stock shares and given to the Treasury to sell. That isn't a stock split, it's a form of stock dilution that would be illegal for anyone else. For example, the owners of a public company cannot simply create stock, give it to themselves at no cost, and then sell it at market prices to make themselves a profit. (They can do so to raise money for the company, which is a flow in the opposite direction, causes dilution of other shares, sometimes causes percentage ownership changes, etc.)
The key, of course, is how little the Fed paid for the initial shares - it technically counted as a loss when they gave up those shares, but it's so small that it's essentially ignorable. Then, once the stock had been through a reverse split and was back up to reasonable levels (see Quantitative Easing and its effect on the stock market), they could simply convert those shares into whatever number of common shares was necessary to ensure the transaction was profitable. Do the math - 563 million shares at ~$30 per share = $16 billion, give or take, which was plenty to cover the margin necessary to make the transaction appear profitable.
(If you want to investigate this yourself, see the SEC filing on the issuance of the Series C preferred shares to the AIG Credit Facility Trust - 100,000 shares at $5 a share, $500,000, 77.9% voting control of the company. These shares were later converted into the 563 million common shares, per the recapitalization terms.)
And that, of course, is just that one transaction.
The problem with your Maiden II and III comments is that the bottom line - the purchase prices and sale prices - shows a net gain for the treasury. You can make whatever claim you like about handwaving and revaluation and whatever, but when you get back more than you paid, that's a profit.
If only it were that simple. The problem is, of course, the Fed's position on both sides of the transaction. If Maiden II and III acquired toxic, worthless assets at inflated values from AIG, how did they turn a profit? Well, the key is to remember how those assets work - essentially, as long as the stock market is going up and credit is cheap, they are profitable. So, what the Fed needs to do to is re-create the environment in which the assets it purchased become profitable again.
- AIG holds toxic assets, and has toxic insurance policies on other people's assets. Eventually they can't pay.
- Fed creates Maiden Lane II and Maiden Lane III, funds them with created money (~$45 billion).
- MLII and MLIII buy the toxic assets at prices far above market price, both directly from AIG and buying other assets for AIG to eliminate AIG's liability. This transfers the created money to AIG.
- AIG pays its creditors 100 cents on the dollar, transferring the created money to them.
- The Fed pours money into the economy via various Quantitative Easing measures, re-inflating the stock market, depressing interest rates, and creating the environment necessary for the toxic assets to become profitable again.
- The creditors (Goldman, etc) then turn around and buy the assets from MLII and MLIII at re-inflated prices, transferring the created money back to the Fed, which also gets a little extra from the interest on the assets and loans, and of course everything is profit because the Fed has no capital costs on the created money.
So the Fed essentially controls both sides of the transaction, and can thus pretty much determine what the price will be. Of course, it should be obvious the problem this creates - the Fed has re-injected a huge amount of toxic, risky financial products back into the economy, specifically for the benefit of the favored banks.
The point of all this is not to argue that the transaction weren't profitable - it's to explain how the Fed makes sure that everything it does is profitable, and how that is a problem for the rest of us. That's why I called it a shell game - it's all about showing profits in some places while hiding money creation in others.
I'm not a financial expert but I found the following articles interesting when talking about the effectiveness of TARP. During the crisis, the upfront $700 billion given to companies like AIG was just the tip of the iceberg. The government had secretly pledged at least $8.5 trillion to bail out the financial sector. Now I realize that much of this money was not actually spent, but I think it's incredibly dangerous to herald the success of a bailout that potentially could have doubled the deficit and cost the country more than the Louisiana Purchase, the New Deal, and the Vietnam and Korean Wars combined in inflation adjusted dollars. That really worries me that the government will not learn its lesson next time.
http://www.motherjones.com/politics/...
http://theweek.com/article/index/915...
One last thing - the bailouts to Freddie and Fannie are still costing taxpayers $137 billion according to CNN.
http://money.cnn.com/2012/12/19/news...
The Fed pours money into the economy via various Quantitative Easing measures, re-inflating the stock market, depressing interest rates, and creating the environment necessary for the toxic assets to become profitable again.You know, at the point in your argument where the Fed tanks the economy to protect it's investment in one company in the TARP bailout, I give up. You win. If the conspiracy is that big, there's no way to trust anything the Fed says. Time to head for the hills.
I think you have something you believe and no argument can sway it. Characterizing the argument as believing in a "conspiracy" is the ultimate straw man. What you're saying is that either a cabal of rich white fat cats twirled their comically evil mustaches and plotted in a dark basement somewhere or the entire argument Aetius is making is invalid.
How about this possibility... The US government financial bueracratic and regulatory branch is staffed by a revolving door of former (or future) Wall Street veterans who see Wall Street finance as the "right" way to conduct business. When Wall Street gets itself in trouble they come up with convoluted and complex ways to keep Wall Street going as usual. You can setup a straw man where the only way this is possible is some complex conspiracy. However, there's another possibility. It's also possible that all these Wall Street insiders honestly believe that is good economic policy to give money to the banks. That Wall Street really is a force for good (and a way to make some money, win-win). That they're willing to bend over backwards to find ways to keep the status quo rather than make hard choices that will send the US into a deeper recession and take money out of the pockets of their friends.
You see a conspiracy as the only way this is possible. To others, however, this is the way Washington works. It's the way Wall Street works. There is no evil conspiracy. There are a bunch of people who think this is how the world should work.
Yeh, this all or nothing approach is not something I`d have associated this forum with. The more I read your discussions, the more they resemble arguing about religious matters. They shouldnt.
I'll comment in more detail later but you're talking about the same government who lies all the time. They lied about Iraq. They lied about how to fund Afghanistan and Iraq. They lie constantly about how we actually fund social services. They lie about the state of the US and world economy. They* lied in their initial accounting here. So here I'm supposed to believe them?
Even Clinton lied when he said we ran a surplus. We ran a surplus for a couple of years on the back of a giant bubble. I don't think there is some is some vast conspiracy. But I think that the US govt. is populated by Wall Street financiers who think Wall Street financing is a net force for good overall. And a little white lie in the name of keeping their jobs or boosting the economy seems completely plausible to me.
*They being career politicians from both sides of the aisle.
If TARP really made the US government more money money than it spent, then I suggest the government invest its way to a balanced budget. The fact that the government isn't making these investments, tells me all that I need to know about TARP.
I love this thinking where lack of evidence for something is somehow converted into evidence that it must be true. Oh, wait, no I don't. I actually hate it.
If TARP really made the US government more money money than it spent, then I suggest the government invest its way to a balanced budget. The fact that the government isn't making these investments, tells me all that I need to know about TARP.
Well it used to, but we reached a point politically where direct funding and investment of any sort has become forbidden, and the only conceivable ones are in the form of tax credits. Twice the US had a national bank, in the early 19th century. We then get into the talk of how this is communist for the government to have a stake in a private corporation as well, and it falls into punching and biting.
So Barofsky, the guy who Aetius cited, lied about TARP making money on AIG overall? He, the biggest critic of TARP, and a guy with extensive internal knowledge of it due to his rule in oversight, he also is lying to us?
Now I'm really confused about who to trust.
No one, just get to your tin roof shack in Montana. You know that wife? She is lying too, faked it every time, and is nailing the UPS man. What can brown do indeed?
Look, I'm not trying to present some airtight court case on the state of TARP. The burden of proof is on the people who are saying that TARP was "free" or that it made money and I just don't buy it. I'm not saying that someone couldn't convince me that TARP somehow made money. I'm not being dogmatic about it. But I doubt anyone is taking into account the extraordinary actions of the Fed buying toxic assets and turning those into good debt. I don't think anyone is taking into account the full spectrum of government action taken (national bailouts, defunding of state and local services) that helped keep all of this afloat.
My mother, along with thousands of other teachers took a huge pay cut to balance the books in her state. Other states busted the unions and took money from pensions. So even if the government technically broke even that buck was passed on to states and individuals. If someone wants to take all of that into account and prove that we (every individual and government institution) was made whole then I'll believe that TARP was a wild success. Until then I don't believe it.
Yeah but in Robear's defense he is talking about AIG (only) and you are talking about TARP (globally).
Yeah but in Robear's defense he is talking about AIG (only) and you are talking about TARP (globally).
They're not separate, though. That's my point. If you use quantitative easing to make AIG and GM solvent and you kick that can down the road to states who take it out of the hides of individuals those are all tied together. That's why I feel strongly that no one can say with authority that AIG has been a net plus until all of that accounting is considered.
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