The Profitable Bailout? Inside the Real Costs of the Saving AIG and Wall St.

The government should be proud of its amazing rescue of AIG. But even this "good" bailout came at a steep price.

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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).

The Sorkin/Treasury vs. Barofsky spat, however, obscures the true historical place of the AIG bailout. Many administration critics, including Barofsky and including me, have always said that the Federal Reserve's emergency action on September 16 was the right thing to do, since the alternative was, at minimum, a much more destructive firestorm of panic in the financial markets. And it was done on plausibly reasonable terms. It was more generous than the market would provide (since the market wouldn't lend AIG money on any terms), but it was relatively punitive and as good for taxpayers as could be hoped. The credit line had a high interest rate, the government got 80 percent of the company, and the CEO was forced to resign. It was precisely because of those harsh terms--in particular the effective nationalization of the company--that Treasury can claim to have turned a profit on the deal.

It was what came later that I and others criticized: The use of AIG to bail out investment banks like Goldman Sachs by closing out transactions on unfavorable terms for AIG (and taxpayers); the continued payment of large bonuses to traders at AIG Financial Products; and, most importantly, the kid-glove treatment of Citigroup, Bank of America, and the other megabanks that would have collapsed were it not for government support. Unlike AIG, they were given cash on Christmas-present terms while Treasury took only a minimal amount of equity, meaning that taxpayers had all of the downside and very little upside. The CEOs, who drove their banks over the cliff and into the waiting government safety net, were allowed to keep their jobs.

At the time (early 2009), administration supporters argued that the government couldn't take majority stakes in the big banks. That would be "nationalization," which is a big, scary word that sounds kind of like "socialism." Well, we nationalized AIG, and now the company is getting universal plaudits for its performance during the period it was owned by taxpayers. JPMorgan, by contrast, keeps noticing that more billions of dollars are slipping through its pocket, and Bank of America is struggling to keep its head above water. Above all, these non-nationalized banks are still doing a lousy job extending credit to the real economy, preferring to keep their money in cash.

Tell me again what the problem with nationalization was?