Why Treasury is being so nice to AIG

By Felix Salmon
February 28, 2012
Andrew Ross Sorkin today asks why Treasury is letting AIG keep billions of dollars in net operating losses, rather than forcing it to pay income tax.

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Andrew Ross Sorkin today asks why Treasury is letting AIG keep billions of dollars in net operating losses, rather than forcing it to pay income tax. I’ll hazard a guess at one part of the answer, as informed by my conversation with Jim Millstein in October 2010: if you want to have a high value for your insurance company, you want it to have a rock-solid credit rating. And so you boost the value of the equity cushion in the company by padding it with net operating loss carryovers and the like, even if that means you lose a certain amount of corporate income tax in the meantime.

But there’s something else going on here too, which is the optics of the AIG bailout. The New York Fed today announced that it had finally exited its Maiden Lane II portfolio — the toxic securities bought at a discount from AIG in the 2008 bailout — at a healthy profit of $2.8 billion. It held on to those securities in May 2011, when AIG itself offered to buy them back at a much more modest profit for the Fed. And when forced to choose sides between AIG and the Fed in 2011, Treasury sided with AIG. At all times, Treasury wants what’s best for AIG’s share price, so that it can, hopefully sooner rather than later, sell off its entire 77% stake in the company at some kind of profit.

It’s already taken longer than Treasury would have liked: there was a feeling when I spoke to Millstein that the sale of AIG might be reasonably imminent, and yet here we are, more than 16 months later, and we don’t seem to be all that much closer to such an event. So unless and until AIG gets sold, expect Treasury to continue to shower it with as much regulatory forbearance as it can possibly corral.

I’m sure there are a lot of people at Treasury who would dearly love the company to be fully privatized before the election, and there’s essentially no chance that’ll happen if the share price is much below the break-even point of $29 per share. We’re close, now, and I’m sure that Treasury wishes that AIG had managed to buy back those Maiden Lane II assets on the cheap so that the share price could have been even higher. There’s still time to privatize AIG while Tim Geithner is still Treasury secretary. And Treasury will do everything it can to make that happen, if it can do so without exiting at a loss.

6 comments

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This would be the assets that caused so much outrage when GS was “bailed out” by giving 100cents on the dollar? The same ones that AIGFP was knocked for writing protection on?

Posted by Danny_Black | Report as abusive

Who is the winner in this?
Who is the loser?
Such a mystery…such a mystery….
Because the Fed always has the best interests of the Amercian people at heart…
So does the Treasury…..

The only question is: Does the taxpayer die by bayoneting or by being shot?

Posted by fresnodan | Report as abusive

Are these tax credits going to increase the value of stock options or bonuses of ex-executives that created the 2008 derivatives disaster ? that would be insulting to the USA Taxpayers that paid for the bail-out, 3 trillion dollars and counting ….

Posted by antonveronic | Report as abusive

This year’s Golden Globe Award was voted the deadline in November 15th, before the World Cup qualifying play offs, which makes the C, not by virtue of its performance in the play offs Shen Yong, the competition become golden weight