The government should be proud of its amazing rescue of AIG. But even this "good" bailout came at a steep price.
This week, the Treasury Department sold another large slug of AIG shares that it bought in the dark days of 2008-2009, bringing government ownership below 50 percent for the first time since the financial crisis. The deal was priced at $32.50 per share, above the $28.73 break-even price as determined by Treasury, lending support to claims by government officials that the bailouts (a) made money and (b) were a good idea. The most emphatic cheerleading came from Andrew Ross Sorkin, who declared victory for the government and quoted a White House official saying of longtime critic Neil Barofsky, "Some people just don't like movies with happy endings."
If only things were so simple.
First, there's the little question of Treasury's arithmetic. More importantly, AIG was in many ways the "good" bailout, where shareholders were almost wiped out, the CEO was unceremoniously dumped, and taxpayers got most of the upside. In contrast, it was the government's treatment of the biggest banks that was the travesty.
On the arithmetic: Treasury calculates a breakeven price of $28.73 for the federal government's entire investment in AIG, including the emergency $85 billion line of credit extended by the Federal Reserve on September 16, 2008 and another $38 billion transaction the next month. But what happened next is that in November 2008 Treasury used TARP money to buy $40 billion in Series D preferred shares, giving AIG cash to pay down its credit line; in March 2009 Treasury used another $30 billion in TARP money to buy Series F preferred shares (while converting the Series D shares into Series E shares on more favorable terms to AIG), and also bought a big chunk of convertible preferred shares. (The details, as I could piece them together at the time, are here.)
Barofsky calculates a breakeven price of $43.53 for TARP's investments in AIG, which Sorkin doesn't contest. This is relevant for two reasons. First, it shows that the terms of the November and March restructurings were less good for taxpayers than the terms of the original bailout. Second, if you are trying to evaluate Treasury's decision to use TARP money--which was Barofsky's job, after all, as special inspector general for TARP--$43.53 is the relevant price. If you're evaluating all federal government involvement, then arguably $28.73 is the relevant price.
But only arguably, because if you're evaluating all federal government involvement, you have to evaluate all of it--including all the cheap money that the Federal Reserve used to keep the financial system afloat and protect the value of the assets that AIG unloaded onto the ... Federal Reserve. One consequence has been depressed rates for savers. Because I saved a lot of the money I made in my business career, negative real yields on bonds, money market funds, and savings accounts for the past three-plus years have cost me thousands if not tens of thousands of dollars. That's fine for me personally: I can afford it, and plenty of other people need money more than I do. But that money was part of the cost of shoring up AIG. More generally, you can't separate the accounting cost of the bailouts from the total costs of government policy, as brilliantly explained by Steve Randy Waldman (hat tip Yves Smith, who has additional issues with Sorkin).