Serena Ng has been keeping an eye on AIG’s share price, which is far below where it was trading at the beginning of the year — and below even where it was in October, when Treasury’s Jim Millstein told me that Treasury was going to make a profit of roughly $13 billion on the money it used to bail out AIG. That’s looking increasingly unlikely: Treasury’s break-even price on its AIG stake is about $28.70 per share, and at current prices it’s going to have to accept less than that if it wants to sell $20 billion of stock into the market.
There are three issues at stake here. First, should Treasury have converted its AIG debt into equity just so that it could exit its position more quickly? Second, will Treasury manage to disentangle itself from AIG at a profit? And third, does that matter?
Governments care very much about the 0% return level on their investments in private companies. If they make more than that, the investment/bailout is considered a success; if they make less, it’s a failure. That’s a bit silly, but the psychology is at least easy to understand.
But if Treasury wanted to end up extracting more money from AIG than it put in, the safe and sure way of doing that would have been to keep its investment as debt, rather than converting it to volatile equity. The problem with that strategy is that the stake couldn’t be sold quite as quickly: for reasons I don’t fully understand, it’s easier to sell $20 billion of AIG stock than $20 billion of AIG bonds.
And one thing that the Obama administration shares with its predecessor is a deep disinclination to have any kind of stake — equity, debt, warrants, anything — in private companies. Treasury hates such things so much that it’s willing to take a higher risk of taking a loss, if that means it can extract itself from companies like AIG more quickly.
That’s an intellectually honest position: after all, the 0% return level is mathematically as arbitrary as any other, and shouldn’t drive government policy. A similar philosophy exists at the New York Fed, as well, which turned down AIG’s offer of a guaranteed positive return on its Maiden Lane II assets, in favor of running a slightly riskier auction which was likely to make more money, ultimately, for Treasury. (Interestingly, Treasury, as the owner of AIG, was the one pushing the Fed to just sell the assets to AIG at a modest profit.)
The big question, of course, is whether the government will really have extricated itself from AIG even once it sells all its shares in the company. One thing missing from Dodd-Frank was a proper federal insurance regulator: the insurance industry is still regulated on a state-by-state basis, and the NYT this morning has a rather alarming story of the way in which various states are competing with each other to see who can be the most lax on that front.
Insurance companies in general, and AIG in particular, are still too big to fail: no government is likely to turn around and tell policyholders that they’re simply unlucky that their insurer ran out of money and went bust. So AIG, along with all other insurers, represents a significant contingent liability for the government. Treasury might be trying to get out of its formal stake in the company as fast as possible. But it can’t get out of its informal links.