The multinational insurance corporation American International Group, Inc. (AIG) made headlines four years ago when their credit rating dropped to AA, resulting in a massive liquidity crisis then resultingin a $182.5 billion bailout from the US government. This past quarter, the company reported $19.8 billion in profits, which would seem like quite a turn around from the recipient of one of the biggest Wall Street bailouts.
According to the New York Times however, the company only made $1.6 billion in actual operating profits. “…it quickly became clear that $17.7 billion of that profit was pure fantasy — a tax benefit, er, gift, from the United States government,” NYT reports.
On top of the large tax “gift” A.I.G. received, it looks that the insurance company will not pay any taxes this year, or for the next decade, costing the U.S. government tens of billions of dollars, provided the company remains profitable. The New York Times describes this “tax dodge” may also help cushion the salaries of the business executives who helped create the initial catastrophe.
The U.S. still holds a 77-precent share of A.I.G. (down from 92%), and subsequently draws harsh criticism over the legality of allowing such a tax dodge. Eric B. Rasmusen, a professor at Indiana University, wrote in a paper last year, asking “Can the Treasury Exempt Its Own Companies From Tax?” The NYT adds, “While the paper addressed A.I.G, it focused on the tax treatment bestowed on another bailout recipient, General Motors. Citigroup,Fannie Mae and Freddie Mac also received similar treatment.”
The tax benefit works like this: In 2008, A.I.G. was operating under a “net operating loss” (NOL) before receiving a big government bailout. The loss, estimated to be $25 billion or more, is very valuable as it can be accounted for over many years to lower or wipe out the income tax bills.
When companies file for bankruptcy or are taken over, they foregone this ability to use net operating losses. This is exactly what happened at A.I.G. — the company was failing, the government came in and took over, owning at one point 92-percent.
The ability to use NOL, however, was not recinded. As NYT reports, “the Treasury issued ‘notices’ exempting A.I.G. from losing its right to make use of its net operating losses. In total, the insurer estimated that those losses were worth $26.2 billion as of 2009, and it claimed almost $9 billion in other ‘unrealized loss on investments.’”
Analysts estimate that this practice props up A.I.G.’s stock between $5 and $6 dollars, keeping the stock artificially high and closer to the $29 mark the government needs to sell at to recoup its losses.
Senior Treasury officials have said privately that they did not consider the governments action as a traditional “take over,” and thus the NOL rule would not apply in this circumstance. The practice, however, assumes the government will be able to sell off its shares in A.I.G. to exit the investment.
The tax break also benefits employees whose performance is tied to stock, one main person being the CEO since 2009, Robert H. Benmosche, who received tens of thousands of shares.
So while members of the Democratic party ask the wealthiest Americans to “pay their fair share,” the government will miss out on billions of dollars over the next ten years thanks to this tax exemption, that benefits A.I.G. executives at the expense of the tax payer.
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