On one hand, Black said, “had they simply allowed an unconstrained collapse of AIG, I think it’s true that it likely would have been a terrible decision with really severe consequences.”
But he and others insist that even a largely successful bailout comes with its own set of circumstances.
“It creates perverse incentives,” Black said. “There’s an enormous danger to providing bailouts to systemically dangerous institutions and, in particular, bailing out their creditors 100 cents on the dollar. That danger is that you create crony capitalism.”
In addition, Black said that while the government had done well in recouping taxpayer money, it had “missed an opportunity” to use its majority ownership of AIG to force the company to shrink even more than it did and to eliminate it as a systemic risk to the financial system.
Christy Romero, the special inspector general for the government’s bailout fund, the Troubled Assets Relief Program, shares concerns that the success of the AIG bailout could lead investors to expect the government to rescue other firms whose failure could threaten the economy and thereby does not adequately discourage excessively risky practices.
“There are significant issues of moral hazard,” Romero said. “The whole notion of the bailout is that these companies like AIG who did risky practices are insulated from the consequences. All of us, as taxpayers, had to put AIG on our shoulders.”
Despite the lessons of the crash, AIG still deals in complex derivatives, which fueled its meltdown, and has no single banking regulator watching over its non-insurance financial businesses, Romero’s office noted in a July report. “Effective, comprehensive, and rigorous regulation of AIG is vital to ensure that history does not repeat itself,” the report stated.
If officials eventually designate AIG as a “systemically important” financial firm, the Federal Reserve would become the company’s primary regulator, and AIG would find itself subject to stricter standards and oversight. So far, that has not happened.
“It’s not over. It still remains as one of the largest TARP investments,” Romero said. “I don’t think you can declare anything a success story — or a failure — when you’re still in the middle of it.”
Linus Wilson, a finance professor at the University of Louisiana at Lafayette, who has closely tracked the government’s bailouts, calculated that the taxpayer stake in AIG should drop to between 16 and 22 percent after the pending sale. In addition, he estimates that taxpayers could exit AIG by the end of the year with a profit of about $4.5 billion.
Wilson said he believes Treasury officials erred by not liquidating more of the government’s stock in AIG early on, when its stock price hovered around $40. It closed Monday at $33.30, up more than 38 percent on the year.
Despite the what-ifs, Wilson said the AIG investment is likely to return more taxpayer dollars than some other high-profile bailouts, namely automakers Chrysler and General Motors and mortgage-giants Fannie Mae and Freddie Mac.
“If the government breaks even on AIG,” he said, “that’s a lot better than expected.”