US Government sells last stake in AIG; bailout resulted in profit for taxpayers.

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.

Bloo Driver wrote:
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.

By that logic, Malor, the US government owns every corporation in the country! In America, state owns you!

Aetius wrote:

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.

Your article was from March, Aetius, and the shares were sold at over $32 each. Note that when you total up the money, there's a surplus. You could argue nine months ago that maybe the money came from another part of the government, but with this, the shares were owned by the government, and sold by them, and produced a surplus.

The argument Barofsky made was that, for some reason, shares owned by other parts of the government, acquired at different stages of the bailout, should be counted at the share value of the preferred stock, rather than the common stock for which it was later exchanged. There's more common stock than preferred, so more shares to sell, so that lowers the needed price per share. Barofsky disagreed with the whole idea, and so he's not inclined to be fair in his argument.

In reality, the shares by the Fed and TARP were both sold, and a profit resulted. An article from last March which says "we can't know until it's finished whether we made money" isn't important any more, because it is finished, and we made money in the end.

So Barofsky was just wrong. 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.

Robear wrote:
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?

Aetius wrote:

Wow, how exactly does one acquire shares at zero cost?

By issuing more shares for the same amount of money in the recapitalization. This is not like you; you usually don't have trouble with math. If I buy 1000 shares at thirty, then resell them by breaking them in half so that I now have 2000, each share only has to sell for fifteen for me to make my money back. The government bought 1.1B shares, the company converted them to 1.6B, and the government sold them, but that of course means that the per-share basis - the price needed to break even - dropped due to the larger share pool. Work it through, it'll make sense when you think it over.

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. This article may help.

I don't understand what your worry is here, except possibly the belief that a government bailout can't possibly work or turn a profit. But in this case, the government put out x dollars, and got x + 12% back after the dust settled. About 4% per year. They didn't have to vanish money or create money to do it; it was done first by the government buying assets, and then selling them on the open market. You can't fake that latter sale. The only "magic" here was that of the market; over the period in question, AIG's stock went down to as low as $8 a share, then up again to around $34.

You've got a really dubious reading of an old criticism, one which even says that we'll have to wait to see whether the Treasury made money. Well, we waited, and after all the shares were sold, a profit was turned. The TARP bailout worked, even though you don't like bailouts - it prevented a bankruptcy that would have harmed stockholders and business partners and employees, it forced AIG to sell many units and restructure, it got rid of bad debt on the open market at a profit, and it turned that profit back into the Treasury to cover losses in other parts of the TARP.

You're not making your general arguments any stronger by flogging this dead brony. It's not gonna get up and neigh again. The bailout worked, and TARP is closing in on an overall profit. Here's a tracker from ProPublica. If I were you, I'd focus on the Fannie Mae and Freddie Mac side of things, where the only payback has been revenue, and there might never be an actual payback. That's a bigger potential loss.

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.

Robear wrote:
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.


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'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...

Thing is, it's very easy to confuse people with all the financial intricacies, and as was pointed out, Aetius's primary source not only had an agenda against TARP, but the article he cited was 9 months old and out of date. Outside of that, Aetius and I read the same articles and came to entirely opposite conclusions. But when the argument goes to "Well, the government tanked the economy to help cover up financial shenanigans", well, that's not really within the bounds of normal discourse. That kind of claim goes well beyond credibility, and is not refutable, and raises questions that are so much bigger than just TARP that it's amazing that it comes out at all. I'm just not prepared to do all the research and dig into it, because if someone accepts that level of conspiracy, there's no way any ordinary facts are going to get them to think about things in another way.

I agree with you JD, that the Fannie and Freddie bailouts deserve watching. At the same time, we have to consider the fact that they *were* broken, and the damage due to that was certainly larger than the bailout (and the potential damage even worse). I'm also extremely dubious of arguments that something that *didn't* cost us an arm and a leg "could have". That's creating a straw man, unless all you're saying is that we should consider drastic actions very carefully. Given that things actually turned out well, it's pretty obvious that whatever considerations went into the bailouts were done competently, rather than badly. I understand if you're suspicious of the government's capabilities; we all should be skeptical. But projecting that worry back in time after something has turned out well is only worth it when it's obvious that wrong was done but somehow recovered. That does not appear to be the situation here.

Robear wrote:

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'm confused, DS, forgive me. Are you arguing against Aetius' conspiracy theory? Saying I misread him? Was I wrong to conclude that the crux of his argument was that the Fed manipulated the $15T economy for the benefit of Wall Street, rather than the public good? (Ignoring the obvious bad effects of firm after firm collapsing, of course - that was the alternative at the time.) Help me understand. I do sometimes misread things. Your point is well-taken - there are a lot of Wall Street types at the Fed, and they do influence policy. But the implication that they would screw the entire economy for the benefit of the few is hard to swallow, given the magnitude of the consequences of screwing that up in turn. Are they really willing to take that risk, or is it possible that they are simply, essentially, making it up as they go along, in good faith as they understand it, with mistakes and successes scattered on the path? That I can buy. Conspiracies, I'm suspicious.

DSGamer wrote:

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.

Note that I also argued that Aetius' sources were out of date, which they were, and that the differences in our stances were based on different readings of the same data. I don't believe in the conspiracy, but it's required for Aetius' reading.

So Aetius arguing that the government is lying about what it did, that's not something that I'm required to accept in his premises? But his argument doesn't work without that, because on the face of it - what I've seen of the documents - one has to posit that there's more than what's actually been released, *or* that the AIG bailout turned a profit. Because if the government is *not* lying, that's what happened. If it *is*, then there's no data we can trust.

That doesn't strike you as a one-sided argument? Where does Aetius leave open the possibility that the government is actually *not* lying about this? Where do we get the data on that that he will trust?

Most, what do you mean by "all or nothing" approach? Mine or Aetius'? Confused here. Should I spend hours researching the details only to be told that the sources I used are completely unreliable and I'm naive to believe them? Because if the starting point is "well, the government is totally lying here", then that's where the argument ends, because all we have to go on are the public financial statements issued by the Fed in this matter.

tl;dr - the government said it made a profit on the AIG bailout, and provided documentation for that. if it didn't, it's lying, and we can't trust any of that data. since there is no other data on it, i can't come up with a way to convince anyone that they are wrong. therefore, the argument is dead if we accept Aetius' premise.

Maybe I can clear things up a bit. Neil Barofsky noted on September 11 that the government *did* make a profit on loans to AIG, as I noted. But he also says that TARP's other activities in regards to AIG still cost the taxpayers money, which I don't dispute. However, he notes that the combined effect of the two will still show a profit for the government, and that's the important thing to understand about his argument. (And of course he had no way of knowing that in March or April, whenever the previously cited article was from.)

So even Neil Barofsky, while he's upset about the account transparency (and he should be) accepts the government numbers and believed on Sep 11 that while there were profits and losses, the profits likely would overcome the losses. That does not negate the transparency issues, or the mistakes made, but it does mean that Barofsky, even as a critic, accepts the government numbers, and so should we.

https://twitter.com/neilbarofsky, scroll down to Sep 11.


Henry Blodget ‏@hblodget

@neilbarofsky Professor B! Why shouldn't the Fed's AIG stake be counted in bailout profit/loss? It's still taxpayer money
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11 Sep Neil Barofsky Neil Barofsky ‏@neilbarofsky

@hblodget it should be, and I never suggested otherwise. But my job was ensure accurate TARP accounting. And TARP will bear loss on AIG.
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11 Sep Henry Blodget Henry Blodget ‏@hblodget

@neilbarofsky But government (eg taxpayers) as a whole is making a profit on AIG capital injection, right?
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11 Sep Neil Barofsky Neil Barofsky ‏@neilbarofsky

@hblodget well, technically, making money on the Fed's loan, but losing money on equity injection and DTA. Overall likely to be in the black

Okay? Does that help in understanding where I'm coming from? Making money on the Fed's loan, losing money on equity injection and DTA, but making money for the taxpayers overall.

This article discusses the pros and cons pretty well.

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.

Greg wrote:
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.

Robear wrote:
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?

DS, I get what you're saying, but the problem there is there's nothing to discuss in the case you make. "Look at the Fed's numbers..." "Nope, they lied." "Well, the text of the bill says..." "Nope, they are lying." "This Board has an oversight function..." "Nope, it's all rigged, they're lying." There's no discussion possible. That's fine, but it's not useful in a two-sided discussion, because there's no give and take. No possibility to reach a consensus.

That's why I was reluctant to go into an analysis of this (besides the sheer time involved in doing so, and the emotional effort in fending off the aftermath.) I can put together tons of data and analyses for you to look at, but if your starting point is "They lie", then the ending point is "I don't care what you show me, they are lying." And that's not a refutation of anything; it's a blanket rejection of *everything*.

Normally, we'd look at the figures and compare sources and try to find a lie, then try to figure out why it happened. This is what Barofsky did, and he found obfuscation in the *methods*, but he agreed with the overall *conclusions*. He didn't find lying in the profit/loss statements, he found it in the way the government explained the mechanisms, and he worried that the financial success with AIG would be incorrectly extended to all of TARP, which as he noted has some serious issues in accounting and methods. But with this approach, we don't need any evidence at all. We just say "No need to look at the evidence, the sources are liars" and we're done.

It's easy, but it gets us nowhere.

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).

LeapingGnome wrote:
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.

DSGamer wrote:

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.

As pointed out, I'm not saying that TARP made money. In fact, I've pointed to several sources that said that it hasn't. I stated above that the AIG profit went back in to the government to help cover losses in other parts of the TARP program. In fact, in the OP I give the recent accounting of TARP overall, which is not yet in positive returns.

I honestly think you guys are reading what I'm writing with the assumption that I'm saying something that I'm not. TARP has not made money yet. There was a lack of transparency in the methods used to rescue AIG. The whole situation could have been executed to much better public benefit. And yet, the money put out by the government in the process has been returned entirely, with about 12% profit.

I posted that because we had a few years of "bailouts will never return money to the government" and similar claims. If we can't even admit that this happened in the case of AIG, are we actually even discussing the real world anymore? Because I could swear that we describe ourselves as "evidence based". I've presented the evidence, and shown that a major critic of that evidence who was cited in objection actually concedes my point. Isn't that enough to defend the assertion?

What's really disheartening here is that I *agree* with most of criticisms made here, but that the argument positions are so ossified that because I make one unpopular point, no one is willing to admit that the difference in our positions is small. Instead, I've got to be presented as unwilling to change my positions and basing my arguments on dogma. That's frustrating.

DS, quantitative easing was done to a range of companies, not just AIG. Basically, AIG got a checking account with the Fed, like other companies. The results of that were included in the accounting of Fed transactions with AIG. Here, take a look at the record. And then read an article I posted earlier, that explains much of what you're rightfully worried about with TARP overall. AIG is not the problem in this picture, in spite of fears that it would be among the worst investments made under TARP.

States have not been made to pay any part of these transactions, I don't see how you are connecting the dots here.