The U.S. government will invest additional $40 billion into the bankrupt insurer A.I.G. The company will use the money to buy up more or less worthless Collateral Debt Obligations and Mortgage Backed Securities who’s value A.I.G. originally insured. Two off-balance-sheet vehicles will be created to hold these papers. Losses in those off-balance-sheet entities will mostly have to be carried by the government.
The NYT writer trying to explain the issue falls for the sales-pitch. He has been told that the government would get something tangible for its investment in form of more A.I.G. shares. But the numbers do not add up:
The Treasury Department and the Federal Reserve were near a deal to abandon the initial bailout plan and invest another $40 billion in the company, these people said.
…
At the same time, the government, using part of the $700 billion fund, would buy $40 billion in preferred shares in A.I.G.
…
A.I.G. negotiated the original $85 billion revolving credit line with the Federal Reserve after its efforts to raise money from private lenders failed in the panic of mid-September.
…
In exchange for making the loan, the Fed was promised a 79.9 percent stake in A.I.G.The $40 billion of preferred shares will not change the size of the government’s stake in A.I.G., people briefed on the plans said.
How is this supposed to work?
The government already owns 80% of A.I.G.’s shares. It will get more shares now for handing over more money. But the size of the government stake in A.I.G. will not increase?
The WaPo version is not enlightening either. But it contains a morsel of information that the NYT seems to have missed. The NYT writes:
The
government created an $85 billion emergency credit line in September to
keep A.I.G. from toppling and added $38 billion more in early October
when it became clear that the original amount was not enough.When the restructured deal is complete, taxpayers will have invested and lent a total of $150 billion to A.I.G., …
But according to WaPo, the government already spend much more on A.I.G.:
After
the Federal Reserve of New York first extended the $85 billion loan to
AIG on Sept. 16, the company quickly began burning through the funds. Twice, the government had to increase the sum — to $123 billion in early October, then to $143 billion at the end of last month.
Somehow
the NYT (and I) missed the news of an additional $20 billion put into
A.I.G. at the end of last month. But how do the WaPo numbers add up?
Starting with the $143 billion at the end of October we read this:
First,
under this arrangement, the original $85 billion loan would shrink to
$60 billion and could be repaid over five years, two sources said.
…
Second, and most critically, the government has now agreed
to spend $30 billion buying troubled real estate investments that AIG
had guaranteed and that were the cause of the company’s near-failure.
AIG would contribute another $5 billion to this pool.
…
A third component of the new deal would entail the
government buying $40 billion in preferred shares of AIG as securities
for taxpayers. The AIG board was considering the plan last night.
Somehow
the $85 billion will shrink by $25 billion. But another $30 billion and
another $40 billion will be added: 143-25+30+40=188. But the WaPo piece
says with the new plan the total government aid to A.I.G will be a
$150 billion. It makes no attempt to reconcile these numbers.Where do
the additional $38 billion come from?
The Wall Street Journal’s version as well as the Financial Times’ report do not add clarity to this.
The deal is supposed to be announced this morning. But from what leaked
out so far, expect this to be another major rip-off from taxpayers.
Meanwhile the Washington Post reports in a different piece on an illegal Treasury move in late September that will cost the tax-payer another big chunk of money:
In
the midst of this late-September drama, the Treasury Department issued
a five-sentence notice that attracted almost no public attention.But corporate tax lawyers quickly realized the enormous implications
of the document: Administration officials had just given American banks
a windfall of as much as $140 billion.
…
The
guidance issued from the IRS caught even some of the closest followers
of tax law off guard because it seemed to come out of the blue when
Treasury’s work seemed focused almost exclusively on the bailout.
…
More than a dozen tax lawyers interviewed for this story —
including several representing banks that stand to reap billions from
the change — said the Treasury had no authority to issue the notice.
Congress is unlikely to undo the illegal changes. Concludes one expert:
"It’s
just like after September 11. Back then no one wanted to be seen as not
patriotic, and now no one wants to be seen as not doing all they can to
save the financial system," said Lee A. Sheppard, a tax attorney who is
a contributing editor at the trade publication Tax Analysts. "We’re
left now with congressional Democrats that have spines like overcooked
spaghetti. So who is going to stop the Treasury secretary from doing
whatever he wants?"
Indeed.
