Some Say AIG Will Cost U.S., Others See a Chance for Profit

By Zachary A. Goldfarb and David S. Hilzenrath
Washington Post Staff Writers
Thursday, September 18, 2008

One day after the government committed $85 billion in taxpayer dollars to rescue insurance giant American International Group, the ultimate cost of the bailout was in dispute. Some analysts said the government would lose billions on the investment, while others said it could turn a profit.

According to one view, the government's loan does little more than buy time for AIG. It's unlikely that the company will be able to unload billions in toxic assets, leaving the government with little choice but to sell healthy subsidiaries and hang onto the units most exposed to the financial downturn.

"The taxpayers are going to absorb a good portion of the losses that are inherent in AIG's books," said Sean Egan, founder of Philadelphia-based credit-ratings firm Egan-Jones.

A different perspective, though, is that the company, given time, can be revived. Many of the distressed assets on AIG's books could recover. Indeed, at the end of the last quarter, AIG had $90 billion more in assets than liabilities. AIG needed government help only because it couldn't meet its short-term obligations.

"AIG is a no-brainer. If you take a quick look at the balance sheet, what you see is a huge net worth under any circumstances," said Robert Marmon, a turnaround consultant with experience in the insurance industry.

It would not be unprecedented for the government to make money from a bailout. In 1979, the United States guaranteed $1.2 billion in loans to Chrysler. When the automaker was revived four years later, the government earned $300 million in profit.

Yesterday, this much was clear: Any hope that the AIG bailout would stem a panic in the financial markets was quickly dashed as the stock market plunged and some of the strongest firms on Wall Street were left teetering.

AIG's shares fell 45.3 percent yesterday to $2.05, far from their $70.13 high during the past year.

The government intervened to save AIG because officials feared a bankruptcy would send shockwaves through the global financial system, undermining other financial institutions whose investments AIG insured. Like other recently stricken financial institutions -- Fannie Mae, Freddie Mac, Bear Stearns and Lehman Brothers -- AIG was brought low by investments linked to troubled mortgages. The government had tried to orchestrate a private rescue of AIG by a consortium of banks, but private lenders chose not to take on the risk.

Even with intervention, economist Allen Sinai of Decision Economics said AIG still could end up in bankruptcy protection. He said the government is likely to lose money on its loan, and the Federal Reserve's support will contribute to inflation over the long run. Nonetheless, "the cost of doing nothing was probably greater," Sinai said.

In a sign of the haste with which the government put together the bailout, federal officials were still trying to sort out how they would oversee AIG, which has assets of $1 trillion and operates in 130 countries.

A Federal Reserve spokeswoman declined to comment on who from the government is in charge of AIG. Senior Fed staff members said Tuesday night that those details were still being worked through, a process that continued yesterday, and that either the Fed or the Treasury Department would take the lead.

Under the deal, AIG agreed to pay the Federal Reserve a steep interest rate -- 11.3 percent at current rates -- and the government obtained the right to acquire nearly 80 percent of the company's stock. AIG's chief executive was forced out. As to other details, many investors and analysts remained in the dark yesterday.

"What isn't really clear at this point is -- how the government eventually stops owning AIG," said Rodney Clark, an analyst at the credit-ratings agency Standard & Poor's. "They haven't disclosed anything about how those securities are being structured or how the arrangement might one day be unwound," Clark said.

Maurice R. "Hank" Greenberg, former chief executive of AIG and a huge shareholder, had a more basic question.

"We don't know whether or not this transaction requires shareholder approval," he said.

The intervention fueled an already roiling debate about the government's role in saving private businesses.

"This is socialism," said Peter Schiff, president of investment firm Euro Pacific Capital. "This is not free-market capitalism, survival of the fittest. Let people be responsible for their own actions."

Schiff mocked the idea of the government calling the shots at AIG, saying, "I wouldn't trust them to run a lemonade stand, let alone the world's largest insurance company."

Others disagreed.

"We have a mixed economy where it's not a pure capitalist system where the government plays absolutely no role in the private economy," said John Irons, a director at the left-leaning Economic Policy Institute. "This is clearly the pendulum swinging towards the government having a more intimate role in the private economy."

Some questioned how to measure whether the intervention was working. Edwin M. Truman, senior fellow at the Peterson Institute for International Economics and a former Treasury official, said it was a three-part test.

First, he said, it's a question of whether the government is able to dismantle AIG without sparking a panic. Second, it's a question of whether it can do so without losing some or all of the $85 billion. And finally, it's whether the markets ultimately settle down.

David M. Walker, former comptroller general of the United States, warned that the government's ability to offer bailouts is not boundless.

"The real question is: Will Washington wake up and realize that the federal government's finances are not in good shape and that we need to start getting our nation's fiscal house in order," Walker said. "If not, some may start asking, 'Who will bail out America?' "

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