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AIG Stock Sale Pays Back US Government in Full


AIG's successful repayment of its federal bailout funds contrasts sharply with the hopeless bailout of Fannie Mae and Freddie Mac.

For all the public hatred toward Wall Street in the wake of the 2008 financial crisis, consider this: The US government has now made a $12.4 billion profit on its $182 billion bailout of insurance company American International Group (AIG) – the poster child of Wall Street greed. On September 10, the US Treasury announced that it had sold 553.8 million shares of AIG in a public offering for $32.50 per share. The $18 billion sale reduces the government's AIG stake to only 21.5% -- down from a previous controlling interest of 53.4%. The remaining 317.2 million shares in government hands are just icing on the cake.

This $18 billion share sale by the US Treasury was the fifth since the 2008 bailout and by far the largest – almost equaling the $23.3 billion in total cash received from the previous four share sales, including AIG's re-IPO. Now that AIG is privately-controlled, Standard & Poor's is warning of a credit rating downgrade because the company will now become subject to burdensome Federal Reserve regulations (e.g., higher capital requirements, stress tests, and dividend and buyback restrictions) that will make it harder in the future to earn profits and return cash to shareholders, but investors will worry about that another day. Right now, they seem to be celebrating the fact that a huge overhang of government selling is now out of the way.

Granted, the share of the government's bailout emanating from the 2008 Troubled Asset Relief Program (TARP) remains in the red by about $6 billion (breakeven AIG stock price from TARP alone is $43.53), but when you average the $97 billion bailout from TARP with the $85 bailout from the Federal Reserve, the overall breakeven price is $28.73, which the latest share sale assures. Even if one imposes a 12% cost of capital on the government bailout, taxpayers have come out ahead by about $600 million.

Private-Sector Bailouts Are Getting Paid Back

Whether the bailout of AIG was justified or not – especially the government's ridiculous decision to pay investment-bank counterparties 100 cents on the dollar (page 15) – is debatable, but the fact remains that AIG has been able to repay its bailout in full and this is proof that the private sector's role in the 2008 financial crisis was limited and manageable. The free market works and should not be over-regulated. Even extending the analysis beyond AIG to the entire TARP bailout program, $342 billion of the $411 billion in total TARP bailout disbursements have already been paid back by private financial institutions – an 83% payback rate that promises to improve further in future years. If you look beyond TARP to all "financial stability programs," the government now expects to "at least break even" (page 10).

Government-Sponsored Bailouts Are a Disaster

In contrast to private-sector assistance, the financial bailouts of the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac have been humongous disasters that will never, ever be repaid in full. According the Congressional Budget Office (see page 11 in the preceding link), the cost of the GSE bailouts through March 2011 was $317 billion and climbing, with $42 billion in additional costs expected to be incurred through 2021. The problem is so bad that in August the U.S. Treasury gave up trying to enforce collection of the 10% dividend the GSEs owe on their preferred stock and instead restructured the debt obligation so that the GSEs only have to pay the government any profit they make – which is minimal
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