AIG: How Bad Is It?

Lots of numbers have been attached to the AIG bailout; here again, the House subcommittee hearing was illuminating. Edward Liddy broke down the government’s investments:

BACHUS: Now, I’m aware of the federal loan which is $37.8 billion. The $40 billion TARP, now, that’s $77 billion, $78 billion. Is that what is actually owed? Or is it $170 billion?

LIDDY: No, it’s $78 billion that is actually owed. Let me — if you would, let me break down the pieces. $40 billion of TARP money, you’re a hundred percent correct. $37.8 billion at the end of the 2008; it might have gone up a skosh. It’s in the range of $80 billion is what we actually owe.

Now, the Federal Reserve invested in some of our distressed assets. They bought into financing vehicles that have RMBSs [residential mortgage-backed securities] in them…

BACHUS: Those are the Maiden Lane?

LIDDY: Yes. Maiden Lane II and III. They were able to acquire those assets at a discount at $0.40 or $0.50 or $0.60 on the dollar. They are currently performing. There’s been no credit losses on them. And they are a patient investor. They, and the American public, will do very well on that investment.

So I believe what frequently happens is people take the 40 and they take — we can have as much as $60 billion in the Federal Reserve. We’ve only tapped into, let’s call it, $40 billion. But analysts — writers will take 40 plus 60 plus the $50 billion of assets that the Federal Reserve has invested in and a few other things and they get to that $170 billion number. It’s an important distinction because for us to pay off what we owe the federal government, it’s roughly an $80 billion target right now. And we can do that. But we need some help from the markets to be able to do it.

Liddy says the plan is to finish winding down the financial products division and sell AIG’s international insurance businesses, which are profitable. He testified that he expects to repay the federal government in two to three years, if insurance markets permit favorable dispositions of the insurance companies.

If you put all that together, the taxpayers may not come out too badly on the AIG deal. But that ignores the collateral problems that come from this kind of government intervention in business, of which the current controversy is an excellent example.


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