Opinion

Felix Salmon

Why Treasury is being so nice to AIG

Felix Salmon
Feb 28, 2012 22:57 UTC

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.

COMMENT

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 ….

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How can Benmosche be tamed?

Felix Salmon
Jul 15, 2010 14:02 UTC

Robert Benmosche is probably the highest-paid public-sector employee in America: his $10.5 million salary means that he takes home Barack Obama’s $400,000 annual pay every two weeks. And yes, Obama is his ultimate boss.

Along with his outsize remuneration, Benmosche gets lots of other privileges normally denied to civil servants, especially in this administration. He’s allowed to throw regular diva fits, he’s allowed to bully his own board into submission, and he’s even, it seems, allowed to fire his boss against the board’s wishes. In other words, AIG is not controlled by its 80% shareholder: instead, it’s the Benmosche show, with the rest of us just spectators.

This is, needless to say, a novel way of running a state-owned company. Historically the problem with such companies has been that they were hobbled by interference from above; in this case, the problem is exactly the opposite, that the government seems to have no control over the company at all. Yes, it can appoint board members, but the board members wanted Golub to stay on as chairman and he resigned anyway, and they also seem to be incapable of giving Benmosche any kind of strategic guidance. He does what he wants, and if there’s any pushback from the board, he simply threatens to quit.

All of this is complicated by the fact that you can’t look at AIG’s share price to give any kind of indication of how Benmosche is doing: it’s something out of a Borges novel, a security which gets traded at $37.50 per share but which doesn’t really have any value. The important part of AIG’s capital structure is the billions of dollars in debt owed to Treasury: the question there is not whether it will be repaid (it won’t) but how much of it will be repaid. If that number is going up — if the expected amount that the Treasury is going to get back from AIG is rising — then Benmosche is ultimately doing a good job. If it’s going down, then Benmosche is doing a bad job.

So I’m thinking that Treasury should securitize some small portion of what it’s owed by AIG — just a couple of billion dollars, not so much as to make a big difference, but enough to create a liquid market. Then we can look at the market price of those securities, and judge Benmosche much more easily. Without such an indication, he’ll continue to make a mockery of AIG’s corporate governance, and his bosses, American taxpayers.

COMMENT

Greycap, good point.

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