By James Saft
Dec 12 To say taxpayers made money from their
investment in AIG is to libel the very concept of
Come to think of it, it may well be a gross insult to the
idea of investment too.
The Treasury Department announced on Tuesday it would get
$7.6 billion from the sale of its remaining government-owned
shares in American International Group, taking it to what was
widely reported to be a profit of $22.7 billion on the bailout.
That's $182 billion well invested, is the clear implication,
though even the Treasury seems wary of calling the bailout bucks
profit, using the more bureaucratic "positive return" in its
You can quibble with the figures - for example that math
takes no account of the value of tax breaks AIG received as part
of the deal - but the real problem is with the very concept of
the government investing in public financial companies which
would otherwise go bust.
In financial services, companies take risks with the time
value of money, hopefully creating value in the process. Banks,
or crypto-banks like AIG was, borrow money for short periods and
lend it out at higher rates for longer periods. Interest rates,
the ability to inspire confidence and thus command access to
credit, and credit risk management - how well you choose who to
lend to - are the three cornerstones of profit and survival in
In a fiat currency regime, one in which the government can
create money at will, banks are essentially creatures of the
state, with the government controlling both regulation and, in
essence, interest rates. Those are two important determinants of
financial services profitability, but the U.S. went a huge step
further when it injected capital into AIG, a move that had the
effect of bailing out the insurer's counterparties in the
When the U.S. bailed out AIG, and for that matter the other
banks, it at a stroke removed the issue of confidence, making
them immediately better risks because of the perception that
they had a backer with unfathomably deep pockets.
That makes a nonsense of the concept of profits, much less
of investment; AIG was owned by an entity that had enormous
control over most of the forces which determined how profitable
it was: interest rates, regulation and access to and cost of
So sure there was a "positive return" on the deal but the
real measure of the wisdom of the bailouts has to be a much
wider accounting of the costs, and on this front the AIG deal,
and the banking bailout as a whole, has to be deemed a failure.
There are two strong arguments against the effects of the
bailouts. The first, and most commonly cited, is that the
bailouts may have made things easier in the short term but that,
by creating the belief that the too big won't be allowed to
fail, has set the stage for an even more damaging and costly
crisis in the future. Every bank counterparty in the world lives
in full expectation that should their exposures to a big U.S.
institution turn sour they, like AIG's creditors, will be paid
in full. That moral hazard suppresses volatility but also
suppresses risk measurement by financial markets.
The second, and in some ways more compelling argument, is
that we are already paying for the bailout, in the form of an
artificially large financial sector which serves as a private
tax on the rest of the economy, misallocating capital wildly as
it goes along.
If you want more of something, then subsidize it, and that
is exactly what we've been doing with financial intermediation
for years, culminating in the bank bailouts, of which AIG was a
key piece. The financial sector's share of U.S. GDP almost
quadrupled between the end of World War II and the peak just
before the crash, despite there being almost no evidence that
all this furious intermediation and maturity transformation was
producing anything of value.
So when we bailed out AIG we may have helped to move it, and
the banking industry more broadly, back to profit, but we've
entrenched a system which is over-banked and in which many of
the individuals within it have an inherent conflict of interest
with the public good, with the steady and stable growth of the
economy and even with the good of shareholders.