On the one hand, as we pointed out, the Treasury has from the get go of its ongoing rescue of AIG engaged in continued subsidization of the giant insurer, starting with the all too frequent restructurings of its financings. The net effect was not simply to provide more dough to the AIG, but to put the taxpayer in a worse and worse position. The taxpayer effectively owned AIG, with the first financing secured by all the assets of the company and further holding 79.9% of the equity. The first rule of being a creditor in a troubled company is that you want the most senior position in the capital structure, always. That rule was repeatedly violated with AIG.
The latest until now took place in the pre-IPO restructuring, which looks to have provided a further $6 billion to AIG. Some creative accounting allowed Treasury to claim to the public that the expected losses for TARP accounting purposes were lower, when nothing fundamentally had changed. And if we read the latest, somewhat ambiguous press reports (hat tip reader Hubert, who flagged the issue), it looks like the Treasury’s creative accounting move is at odds with continued leaks at AIG. It appears that the Treasury has given another $2 billion to AIG, at least per Bloomberg and the Wall Street Journal.
First from Bloomberg, “AIG Has $4.1 Billion Charge on Insufficient Reserves“:
American International Group Inc. said higher-than-forecast claims costs cut fourth-quarter profit by $4.1 billion, and $2 billion previously designated to repay its bailout will be used to bolster the property-casualty unit.
The insurer reached an agreement with the U.S. Treasury Department permitting the company to keep $2 billion of proceeds from the sale of Star Life Insurance Co. and Edison Life Insurance Co., New York-based AIG said today in a statement. Funds will be used by Chartis for losses tied to coverage including workers’ compensation and asbestos liability.
The troubling part is “keep”. Unless the Treasury got some form of consideration back from AIG, this sure looks like a gift.
We see similar ambiguous language at the Journal:
American International Group Inc. said it will book a $4.1 billion charge when it reports results for the fourth quarter, as it adds to reserves at its Chartis property and casualty insurance unit….
AIG also said Wednesday that it signed a letter of agreement with the U.S. Treasury to retain $2 billion of the proceeds from the sale of AIG Star Life Insurance Co. and AIG Edison Life Insurance Co. to support Chartis’ capital.
Now with AIG, a mere two billion must look like mere rounding error, but again, pray tell exactly how this reversal of the TARP payback is being accounted for? We’ve had so much sleight of hand with AIG that nothing would surprise me. And with the Congressional Oversight Panel about to go out of business, any pushback is almost certain to be limited.
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Wow. Just how many dollars can be peeled from the backs of taxpayers? In the next few years we’re going to be hearing more about “austerity” – Ministry of Truth code for banks and senior bond holders get paid off and the greater fools (read: American middle-class) will get stuck with the bill. Not to mention the poorest billion on the planet that won’t be able to afford a bowl of rice and beans due to inflationary monetary policy. Not a good situation any way you look at it.
Actually, that’s poorest billion(S), with a capital S. Not a good situation agreed, made worse by the fact that we’ve *just* elected a *democratic* administration in the US who was *supposedly* our bulwark against such further misadventures.
Weren’t we the fools? And to think, we actually mouthed words like “We won’t get fooled again,” once upon a time. Ain’t THAT a hoot?
By the way, as a “rookie cynic,” you only have a few posts or two to put in before becoming a “veteran cynic.” The rules are not hard and fast, but fair to say, cynicism as a credo is catching on these days.
In the words of the immortal Phil:
I was there and I saw what you did
Saw it with my own two eyes
So you can wipe off that grin
I know where you’ve been
It’s all been a pack of lies
Has it ever been said better?
Yves,
I had the same initial reaction to this report. But (I speculate) keep in mind that with the preferred/equity conversion, Treasury now owns 92% of the common. So the “keep” component means that the Treasury gift amounts to $160MM to the non-Treasury shareholders.
Further, to the extent that there are/were questions about AIG’s reserve adequacy, this reserve clean-up, to the extent that it has credibility, may enable Treasury to get a higher price on the re-IPO than they would have otherwise. $0.10 on the stock price makes up the difference.
The capital went into a subsidiary, and one low on surplus. It’s ability to dividend up to the parent is probably non-existent now and in the foreseeable future. This was a transfer from the taxpayer to the policyholders of that sub. Construing any benefit to shareholders is pretty optimistic.
And Treasury has been saying that AIG’s balance sheet is in great shape, that’s been to support the IPO. If they are continuing to need to make emergency infusions of capital, exactly how credible is that claim?
And of course, TARP and AIG is one issue Congressman Issa and Congressman Bacchus don’t appear interested in exercising any oversight responsibility. Given the obvious political hay to be made of dragging Secretary Geithner and his TARP & AIG life support team over the coals on this matter, the interest of all those Goldman Sachs donors appears to be stronger.
We will miss Senator Kaufman from Delaware. Even as a liberal I thought the one reform that made sense the last 20 years was term limits for Congressional Office. Kaufman demonstrated how liberated a person could be without the ambition of reelection.
M. Jed has this right. We own 92% of the company, which essentially means we’re giving a “present” to ourselves (minus the small slice the 8% of non-government shareholders can claim). Hardly seems like a scandale, particularly since it’ll make AIG’s finances look better for the IPO.
Why do I think this somehow ends up boosting the bonus pool?
Maybe I’m just jaded by now.
See my comment of 5:24, this is a transfer to the policyholders. MIght help if you became acqainted with the hierarchy of liabilities of an insurer.
The policyholders don’t own the surplus of the downstream insurance company, the holdco does.
I don’t think the Treasury has any credibility as to the shape of AIG’s balance sheet (nor, should Hank Greenberg for that matter – with the reserve additions taken to date, AIG’s vaunted P&C company was technically insolvent at 9/11. His white paper written after being ousted by Spitzer was irate at AIG’s additions to asbestos reserves in 2005 and they’ve since added on 2 additional occasions).
But Treasury has 1.655 bn shares to sell and needs to pull the wool over somebody’s eyes to keep the stock above $30 (their break-even on the TARP preferred, but essentially wiping out the value of common they help before the pref:equity swap)
It is actually a shame for financial media. Shortly before NY opening they come out with news in such an ambivalent manner.
1) It is a red herring to ascribe the money to a certain transaction (“proceeds from the sale of Star Life Insurance Co. and Edison Life Insurance Co”). Money enters a pool and leaves a pool.
2) AIG cannot put cash into reserves. It charges reserves while putting money into Chartis in form of a capital increase or loan or whatever ….
3) “Retain” 2 billion in proceeds really could mean anything: not pay for now or not pay at all
4) Now Reuters comes out with “clarification” from unnamed “sources”: “The government is still expected to ultimately be repaid in full on its investment in AIG, the source said. The government’s investment is collateralized with assets worth up to $40 billion, the source added.”
Now, “to be ultimately repaid if full” is still not a definite declaration. It just means they will not make a loss at Treasury. They still could give some presents to AIG as they redefined terms maybe 5 times and counting …….
Is there no one in financial media who is willing to hazzle these PR clowns in Treasury/AIG into a definite, unambigious answer?
Sure! The Treasury is tasked to intervene in a rigged market, nothing to see here.
Whether we are “paying it to ourselves” depends on whether there is a dollar-for-dollar increase in the eventual market value of the stock as a result of the infusion. Otherwise, we are merely increasing our cost basis, which will reduce our yield.
I am interested in what happens with bonuses, and where else that money goes. we are giving AIG cash, which they will presumably spend more on something than they would spend otherwise. As we already know, initial the rescue of AIG had little to do with rescuing AIG; it was more about using AIG as a conduit to send taxpayer cash to other players, i.e. Goldman.
http://www.scribd.com/doc/48420877/Tipping-Point-2-3-2011
Until she decides to link to Armstrong, I’m going to consider her as part of the problem.
I’m with McMike. If AIG is bankrupt, we own 92% of nothing. In such a case, the $6 billion never comes back to us. It is used to keep the Ponzi going.
You can see what AIG says it owes the government here:
http://www.aigcorporate.com/GIinAIG/owedtoUS_gov_new.html#
From what I see AIG owed the government $124.8 billion as of 9/30/10 plus whatever its “participation” in the now terminated FRBNY Commercial Paper Funding Facility. A 1/14/11 plan reduced this debt to $47.6 billion. The difference between these two amounts is $77.2 billion.
AIG paid off the FRBNY portion of its obligations: $20.5 billion of debt from said commercial funding facility and another $6.1 billion representing the FRBNY’s cut of the AIA IPO and the ALICO sale. So $26.6 billion.
Most of the rest was the preferred for common stock swap with the Treasury: $49.1 billion.
Then there is another chunk, $20.3 billion, which the Treasury is supposed to eventually redeem from the AIA IPO and from MetLife shares from the ALICO sale..
The remainder is $27.3 billion, down from $29.2 billion, in Maiden Lanes II and III.
AIG lists its current liabilities to the government as these last two, making the $47.3 billion mentioned above. This does not include another $2 billion reserve fund, the new G series TARP shares, since these had not yet been drawn on.
I guess I’m wondering if the $2 billion it is retaining to prop up Chartis is actually drawing on this reserve fund? Or is it a separate deal?
It says a lot about AIG’s weakness that it cut its profit by $4.1 billion and kept this $2 billion less than a month after its 1/14/11 recapitalization plan was put into effect. And again it is important to emphasize that since the US government owns 92% of AIG that cut in profits is a $4 billion cut to taxpayers.
Yves has written a lot about how much the Maiden Lanes are actually worth. I think AIG still has about $500 billion in derivatives from AIGFP. And then there are the questions about its insurance companies and their internal re-insurance. Is the money needed for Chartis a sign of the weakness in AIG’s re-insurance system, that its mainline insurance companies don’t have the reserves they need, and that we could be seeing more actions like Chartis in AIG and the taxpayer’s future?
So why are Americans not taking to the streets and rioting over this?
Max Keiser explains: “All you need to give an American to be happy is a gun and a box of doughnuts.”
Ya know, if the Egyptian movement had taken the same attitude — suitably transposed to Egyptian foodstuffs and fetish objects, that is — toward the Egyptian people, they would already have been turned to red mist by the Army. So you might want to rethink your tactics here. “We’re smarter than you” is a trope the left has been using for some time. How’s that been working out?
I’m curious as to who is going to get their hands on that 80% ownership of AIG? It would seem fair if every person in the US got an option to purchase at a specific price good for maybe 10 years. I suspect the ownership of the company has drifted into the hands of the special interests and this stuff is being done in the smoke filled room somewhere. Note how the company suddenly took to the moon a few weeks ago and news came out how so much of the debt had disappeared. Seems I heard sums in the $100 billion range, but I could be mistaken. Are we seeing another 12 digit theft?
“Harvard Economists Prove that Bankruptcy is Mythical”
I think the ancillary theorems demonstrate that money is shooting out the *ss of AIG, and AIG has paid back the US a gazillion trillion times over.