US profit from AIG inflated, thanks to tax subsidy
The U.S. Government Accountability Office released a report on May 9 stating that the government may potentially make a profit of $15.1 billion on the sale of some of its final shares of insurance giant AIG.
In what was one of the most unpopular bailouts of the financial meltdown, AIG ultimately amassed $182 billion for the U.S. Treasury, giving the government 92 percent ownership of the company.
In terms of the bailout, money might be getting returned at a profit. On the aggregate, however, the government is still losing money thanks to a “tax gift” recorded in the company’s 2011 profits.
In its 2011 fourth quarter earnings statement, the company reported a net income of $19.8 billion, $17.7 billion of which is due to a deferred tax asset valuation. Typically, companies that have filed for bankruptcy or have been taken over by the government are not allowed to claim “net operating losses” on their assets. The U.S. Treasury said that because this was not a “traditional” take over, they would allow it.
The government is potentially missing out on more than $25 billion, according to The New York Times, thanks to this specialized tax benefit.
Meanwhile, the inflated profit reports have kept AIG’s stock artificially high. Bank of America and JPMorgan estimate that this “tax gift” inflated AIG’s stock $5-6 dollars last year. The government needs to sell their AIG stocks at $28.70 per share to come away even. AIG closed the market Wednesday at $31.83.
Other beneficiaries of the inflated stock prices are company executives, whose salaries are tied to stock performance.
The Wall Street Journal reported that “the Treasury agreed to sell $5 billion in AIG’s common stock at $30.50 a share, taking advantage of the company’s elevated share price. AIG bought $2 billion of the stock in the transaction, which reduces the Treasury Department’s stake in the company to 63 percent, or $30.7 billion.”
The Federal Reserve sold off other assets of AIG earlier this year in a series of secret auctions that drew criticism over the limited number of banks invited and the market value of the sales.
“I fail to see how running a limited participation, secret auction is any way beneficial to the owners of these bonds, the U.S. taxpayer,” said the president of a New York-based securitization-market trading analysis firm.
Currently, “The government’s outstanding assistance to AIG is largely composed of Treasury’s common stock in AIG,” according to the GAO report.
The decision to bailout AIG in 2008 was widely controversial. Following Lehman Brothers collapse into bankruptcy, AIG was left dangerously exposed, having insured massive amounts of toxic assets.
When the Fed decided to come in and save AIG, there was brief discussion over whether to force the other banks, such as Goldman Sachs, to take a “haircut” on their AIG insurance policy, or whether or only allow them to claim a percentage of the total policy.
In the end, Timothy Geitner, president of the Federal Reserve in New York at the time, decided that this route would encourage more skepticism in the market at a time when confidence was of the essence. Geitner instead said that the U.S. government had no choice but to pay back the big banks at full value, causing the government and taxpayers to be on the hook for billions of more dollars.
Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation from 2006-2011, said in an interview for PBS Frontline, “There was just willingness to kind of throw lots of money at the problem and I think we threw more money at the problem than was needed to, absolutely.”
Other bailed-out companies have received a similar tax preference, including General Motors, which was able to claim $45 billion in “net operating losses,” despite the fact that they too had filed for bankruptcy.
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