Against All Odds

Article excerpt

Byline: Daniel Gross

AIG might just pay the Fed back.

"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 problematic, thanks to 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; and its general lack of oversight from executives. One figure rankles above all: $182 billion. That was the total financial aid extended by the Federal Reserve and Treasury Department to AIG.

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

It may not come as much relief to taxpayers, but the various efforts to prop up AIG are also working out much better than expected. The Fed and Treasury are still into AIG for a combined $127 billion. But--surprise!--a lot of it is coming back. And there's a not-too-farfetched 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 it. 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 the 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 $35.5abillion, including $25abillion in cash. A week later Met Life offered to purchase Alico for $15.5 billion, including $6. …