Here's a surprise: AIG might pay back $170 billion of its $182 billion bailout.

Commentary about business and finance.
March 12 2010 10:51 AM

It's Payback Time

Here's a surprise: AIG might pay back $170 billion of its $182 billion bailout.

AIG. Click image to expand.
AIG might pay back $170 billion of its $182 billion bailout

AIG may be the only three-letter, four-letter word in the English language. The company ran into huge problems by selling insurance on financial assets without setting aside reserves to pay out claims. When the financial storm hit, no single private-sector company proved to be as messed up: The toxic issues surrounding its payments to Goldman Sachs on credit-default swaps, its absurd insistence on paying bonuses even as it racked up a $99 billion loss in 2008, the general lack of oversight by its executives. One number rankles above all: $182 billion—the total financial aid extended by the Federal Reserve and Treasury Department to AIG.

When you look at the financial markets as a whole, the post-crisis bailout efforts have worked out better than expected. Many of the financial market guarantees were lifted without having been used, and the Treasury is turning a profit on the central component of the TARP. But AIG has so far loomed as a gigantic rebuttal to the optimists, a symbol of everything that went wrong.

Advertisement

But it turns out that the efforts to prop up AIG are also working out much better than expected. AIG still owes the Fed and the Treasury a combined $127 billion. But—surprise!—AIG is paying a lot of its debts back. And there's a not too far-fetched scenario in which we come close to breaking even on our reluctant investment in the company.

Here's how: The Fed in September 2008 extended an $85 billion credit line to the company. AIG paid down $40 billion of that debt when the Treasury Department injected $40 billion of taxpayer funds into the company. But even after the assist, AIG has effectively drawn down about $51 billion of that line. In March 2009, AIG turned over two of its crown jewels, AIA (Asian insurance operations) and Alico (the U.S. life insurance unit) to the Fed in exchange for converting $25 billion of that credit into preferred shares in the two subsidiaries. Once markets recovered, AIG would sell these two units and use the proceeds to pay back the Fed.

A year later, the Fed's strategy seems to have panned out. On March 1, AIG agreed to sell AIA to Prudential plc for $35.5 billion, including $25 billion in cash. A week later, Met Life offered to purchase Alico for $15.5 billion, including $6.8 billion in cash. If both those transactions close this year, and if the stock AIG receives in payment holds up in value (two admittedly big ifs), AIG will generate about $51 billion. That's enough to pay off the Fed's $25 billion in preferred shares plus the remaining balance on the Fed's credit line by early 2011.

But wait, there's more. The Fed in November 2008 created two investment vehicles to remove toxic assets from AIG's balance sheets. The first, dubbed Maiden Lane II, borrowed $19.5 billion from the Fed and bought $20.8 billion in mortgage-backed securities at half their original price. The second, Maiden Lane III, borrowed $24.3 billion from the Fed and bought a portfolio of collateralized debt obligations from former AIG customers, also at about half their face value. Since then, the credit markets have recovered, and these two investment vehicles—hedge funds with concentrated positions, really—are generating enough income to pay off the loans (about $10 billion so far). Meanwhile, the assets, particularly the CDOs, have risen in value. (The figures are updated weekly in the Fed's H.4.1. release.) Government sources suggest that the funds, managed by Black Rock, both have the capacity to pay back their loans and, in the case of Maiden Lane III, to generate billions in profits for the Fed.

That leaves the taxpayers. Treasury bought $40 billion of preferred stock in AIG in November 2008 and in March 2009 said it would make up to $30 billion available to the company in new stock. AIG has drawn down about $8 billion of that commitment. The Fed's profits from Maiden Lane III could allow it to redeem about $10 billion of that $48 billion total. AIG has more cash coming in from the pending sale of yet another subsidiary, its Taiwanese insurance unit. And if AIG continues to recover, Treasury could convert its preferred shares into common stock, as it has done with Citi, and sell them into the market over time. But can AIG generate sufficient cash to replace the public's capital investment? That's the multibillion-dollar question. Nobody at Treasury or the Fed is bold enough to predict that taxpayers will ultimately be made whole. Some rough math suggests the final cost to taxpayers for the AIG debacle could be between $12 billion and $20 billion. Yes, that's a bitter pill to swallow. But it's a much smaller pill than we imagined even a few months ago.

A version of this article also appears in this week's issue of Newsweek. Become a fan of Slate on Facebook. Follow us on Twitter.

TODAY IN SLATE

Foreigners

More Than Scottish Pride

Scotland’s referendum isn’t about nationalism. It’s about a system that failed, and a new generation looking to take a chance on itself. 

What Charles Barkley Gets Wrong About Corporal Punishment and Black Culture

Why Greenland’s “Dark Snow” Should Worry You

If You’re Outraged by the NFL, Follow This Satirical Blowhard on Twitter

The Best Way to Organize Your Fridge

Politics

The GOP’s Focus on Fake Problems

Why candidates like Scott Walker are building campaigns on drug tests for the poor and voter ID laws.

Sports Nut

Giving Up on Goodell

How the NFL lost the trust of its most loyal reporters.

Is It Worth Paying Full Price for the iPhone 6 to Keep Your Unlimited Data Plan? We Crunch the Numbers.

Farewell! Emily Bazelon on What She Will Miss About Slate.

  News & Politics
Weigel
Sept. 16 2014 7:03 PM Kansas Secretary of State Loses Battle to Protect Senator From Tough Race
  Business
Moneybox
Sept. 16 2014 4:16 PM The iPhone 6 Marks a Fresh Chance for Wireless Carriers to Kill Your Unlimited Data
  Life
The Eye
Sept. 16 2014 12:20 PM These Outdoor Cat Shelters Have More Style Than the Average Home
  Double X
The XX Factor
Sept. 15 2014 3:31 PM My Year As an Abortion Doula
  Slate Plus
Slate Plus Video
Sept. 16 2014 2:06 PM A Farewell From Emily Bazelon The former senior editor talks about her very first Slate pitch and says goodbye to the magazine.
  Arts
Brow Beat
Sept. 16 2014 6:23 PM Bryan Cranston Reenacts Baseball’s Best Moments to Promote the Upcoming Postseason
  Technology
Future Tense
Sept. 16 2014 6:40 PM This iPhone 6 Feature Will Change Weather Forecasting
  Health & Science
Science
Sept. 16 2014 4:09 PM It’s All Connected What links creativity, conspiracy theories, and delusions? A phenomenon called apophenia.
  Sports
Sports Nut
Sept. 15 2014 9:05 PM Giving Up on Goodell How the NFL lost the trust of its most loyal reporters.