AIG Sale Redeems Bailout Naysayers

Yesterday, I wrote about the sale of the federal government's remaining shares of American International Group (NYSE: AIG  ) , which resulted in a net profit of $22.7 billion.  In that article, I reveled in the fact that the American taxpayer was finally rid of what Federal Reserve chairman Ben Bernanke once referred to as "a hedge fund ... attached to a[n] insurance company."

In my glee, however, I forgot to point out what might be the most important aspect of the sale: the utter redemption of anyone -- wonk, politician, journalist, or concerned citizen -- who was initially criticized for supporting the collapsing behemoth's massive bailing out.

Unsurprisingly controversial
And massive it was. When the hole in the insurer's balance sheet was initially discovered, just as the Fed and Treasury were scrambling to find a solution for the quickly disintegrating U.S. banking system, the shortfall was believed to be only $82 billion. In the end, however, the total tab for saving AIG from bankruptcy came to $182 billion.  

It was the largest federal bailout ever, and it was controversial, as was bailing out Wall Street. This is unsurprising. It was, after all, Wall Street --with AIG coming along for the ride -- that together schemed, blundered, and worked to blow the economy up. And a very good job of that they did.

Wall Street did it by packaging together poorly underwritten mortgages and then happily selling them off to whomever would buy them. Once these packages of bad loans began to default in droves, the banks' delicately built house of cards toppled. AIG did it by jumping blindly -- and with gratuitous financial force -- into the world of credit default swaps, until the massive bets they'd facilitated came due and the insurer-turned-hedge fund couldn't cover them.

Much better than a sharp stick in the eye
Yet, in the end, the American taxpayer strangely came out ahead. As already mentioned, the federal government -- which at one point owned 92% of AIG's shares -- made a net profit of $22.7 billion. And with an option to purchase another 2.7 million shares of stock in AIG, if it plays its cards right, the government could be set to make even more of a profit off the company's near demise. 

The bailout of the banks, it should be mentioned, has proved to be profitable as well, to the tune of $20.6 billion net. The majority of the banks that received TARP money are already back in the black with the federal government, even Bank of America  (NYSE: BAC  ) , and Citigroup  (NYSE: C  ) , two big banks that, post crash, still haven't completely gotten their acts together.

Of course, untold damage was done to investors and to the economy by Wall Street, and AIG might have turned out to be the biggest financial weapon of mass destruction of them all, so I'm by no means putting them on a pedestal for merely making good on their debts. And I would never recommend the federal government make a practice of bailing out collapsing companies in the hopes of one day turning a profit.

But as someone who was paying close attention to the slow-motion destruction of the American economy, and cheering those in government and the media who were calling for massive government intervention to try to keep it somewhat intact, I was happy to hear yesterday that -- if things haven't exactly worked out for the best -- they've at least worked out better than anyone involved at the time could possibly have hoped for. Cheers to that.

Thanks for reading and for thinking, my fellow Fools. After bringing the financial world to its knees, most investors are wary about owning a stake in AIG today. I don't blame them. But as a fully private enterprise reborn, a stake in the (hopefully) reformed leviathan is worth considering. Let the Motley Fool help you sort fact from fiction, and determine whether AIG is a buy, in our premium analyst report on the company. Just click here now for instant access.


 
 
 
 
 

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  • Report this Comment On December 13, 2012, at 5:28 PM, dcgatlanta wrote:

    Thanks for the article. Please help me understand the math. AIG's current market cap is $50B, and the bailout cost taxpayers $180B. How did we come out with a profit?

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