The U.S. Treasury’s sale of its remaining stake in American International Group Inc (AIG.N) will leave taxpayers with a profit of nearly $23 billion – more than the next three most successful bailouts combined.
The government’s profit on the deal is a turnabout from what was one of the most reviled bailouts of the financial crisis.
The 2008 rescue later spurred a senator to suggest top executives at the insurer consider suicide. The Government Accountability Office at one point suggested there was a real chance taxpayers would never be repaid in full.
Yet they were, with $22.7 billion in total returns, including the proceeds of the sale Treasury launched Monday night, AIG said. The government provided AIG with some $182 billion of support.
Before we start dancing in the streets, let’s clarify a few things. We’re still about $38 billion in the hole on TARP, most of the outstanding sums being those lent to the automakers. A lot of the AIG money was actually money paid to European banks that had CDS’s with AIG. Moreover, some losses are not being counted here. How much tax revenue did the government lose because of a stinky economy created by the bailout culture? How much money did we all lose because of that? If the bailouts hurt our economy, on net, to the tune of one tenth of one percent, that would easily wipe out any “profit” from TARP. You might still argue it was necessary as the lesser of two depressions, but let’s not pretend TARP made us all rich.
Most importantly, the money was never the big problem. The big problem was and remains the moral hazard. A big signal has been sent to the big banks that the United State government will bail them out of trouble. Do you think that’s going to cause them to invest more conservatively? And the big banks used that money to consolidate the banking industry, with the Big Five gaining more market share by using the loaned money to buy banks rather than fix the mortgage market. I don’t think it’s all that remarkable that banks managed to turn a profit with monopoly money loaned to them without restriction by the government.
The big risk? This time we are only (so far) out $38 billion. Next time it may be far far worse. And every time someone celebrates TARP “turning a profit”, they should be reminded of the precipice we have put our economy on. If we do end up turning a profit on TARP, it will be because of luck, not because it was good policy.