Will the government profit on the AIG bailout?

AIG says it will.
I’m hardly the expert on the AIG bailout, but way too many people thought we had just shoveled buckets of money over to the enterprise because it bet wrong on mortgages. The company had two related crises. It’s bet on the mortgage industry (guaranteeing credit default swaps) lost a lot of money but was, with difficulty, manageable. The big problem was those guarantees allowed AIG’s counterparties to issue a cash call for the decline in the value of the security.

Imagine having to make up difference when $2 trillion in mortgage securities tanked. In the middle of a liquidity crisis. AIG couldn’t, and as the crisis spread, AIG’s cash needs spiraled. So the government acted as the lender of last resort. But the market stabilized and AIG’s losses on its mortgage bets were less than the amount of cash they needed during the crisis.

That said, I’m not convinced that Uncle Sam turns a profit on this deal. The government will have to sell its 90% ownership carefully over the next few years. Generally, it has the patience to do so, but its profits – if any – will be based, obviously, on AIG’s profitability over time.

Regardless, politicians don’t measure in dollars and cents. They measure in votes. Using that yardstick, this deal was a clunker.


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