Where to start with this one. First I have to say I am disappointed in BW on this. The article is totally slanted and if I am really looking at it, IMO a bit misleading (we will get into that as we go through the piece). This belongs in an opinion section, not a “news” site.There is some stuff here that those responsible for writing it had to know was….let’s say… in a gray area? I debated how to do this and decided rather than be accused of cherry picking sections in an attempt to make my point, I’ll just put it all up right here and then go point by point and let readers decide.
AIG May Not Be as Healthy as It Looks
American International Group, Inc. (NYSE:AIG) has come a long way since its record $182 billion government bailout in the financial crisis. It has been buying back its stock from the Department of the Treasury, helping to reduce Washington’s stake in the company to 70 percent from a peak of 92 percent. It posted a profit of $21.5 billion for the fourth quarter of last year, a showing that helped push the stock price up 40 percent this year through April 24, to $32.40 a share. Analysts for Wells Fargo (WFC) and Bernstein Research (AB) are recommending the shares to investors as the company nears what they believe will be a complete exit from government ownership within a year.
Still, AIG may not be as healthy as it seems. Critics including Neil Barofsky and Elizabeth Warren, who helped oversee the government’s Troubled Asset Relief Program, contend AIG is benefiting from favorable treatment from Washington that amounts to a “stealth bailout,” in Warren’s words. And some analysts, including Morningstar’s (MORN) Jim Ryan, say the insurer’s underlying businesses are struggling.
One point of contention is Treasury’s decision to allow AIG—along with TARP recipients Citigroup Inc. (NYSE:C) and Ally Financial—to use operating losses from previous years to eliminate taxes on current income. The allowance, which typically does not apply to bankrupt or acquired companies, added $17.7 billion to AIG’s fourth-quarter earnings and will allow the company to shield profits from taxes for many years to come. “It’s important to remember that a substantial portion of AIG’s recent earnings were attributable to Treasury’s unilateral decision to preserve AIG’s net operating losses,” says J. Mark McWatters, a law professor at Southern Methodist University who was a Republican appointee to the TARP oversight committee.
Treasury explained its decision on the tax waiver in a March 1 statement: “The government reluctantly” invested large amounts “of taxpayer dollars to prevent corporate failures from causing a collapse of the financial system and resulting in even more severe harm to Americans. Allowing those companies to keep their net operating losses made them stronger businesses, helped attract private capital, and further stabilized the overall financial system.” Mark Herr, an AIG spokesman, said executives could not comment because the company is in a quiet period in advance of announcing earnings on May 3.
Treasury’s rationale doesn’t fly with Warren, the former chairman of Congress’s TARP oversight panel who is now a Democratic candidate for the U.S. Senate from Massachusetts. “That kind of bonus wasn’t necessary to protect the economy,” she said in a joint statement with three other former committee members on March 12. “It also gives AIG a leg up against its competitors at a time when everyone should have to play by the same rules—especially when it comes to paying taxes.”
OK. Lets stop here. Let’s address the “stealth bailout” gibberish. Treasury has made several statements on the tax situation including the following not mentioned above:
“The Treasury earlier this month said the tax provision “originally was intended to prevent trafficking in tax losses” by private companies, and didn’t apply to companies in which the government ended up owning a majority stake as a result of a bailout. At one point, the Treasury owned more than 90% of AIG; it has since fallen to about 70% and the government plans to sell the rest of its stake over time to recoup roughly $37 billion in federal aid.
“It would have been counterproductive–and perhaps irresponsible–to undermine the stability of those same institutions, at the height of the financial crisis, by imposing a tax code provision that was never intended to apply in this context,” the Treasury said. The federal government “is not a taxpayer and has no interest in sheltering taxable income.””
What is lost on Warren, Farzad et all is the concept of ownership. A stock certificate is a share of ownership in a company. When Treasury made the ruling in 2009, it in all reality owned $AIG. In essence, what these folks are saying is that they wanted (and continue to want) $AIG and by its near complete ownership stake the US Treasury, to then (and now) pay taxes to itself. To what point? To delay the exit from $AIG longer? To further weaken the business and perhaps in the end force a loss on taxpayers? Think about the logic. They want $AIG, now 70% owned by Treasury to pay ~$1B in taxes (estimating 30% of the ~$3.7B profit excl tax benefit). So then those funds come out of the profits & available cash that is being used to pay back the Treasury so they can then be paid to Treasury in the form of taxes. Brilliant!!
What is the goal here for taxpayers? To allow the Gov’t to exit the $AIG bailout/rescue at a profit as expeditiously as possible. Right? Wasn’t that the whole idea? Stabilize it and get out fast at a profit? So why slow it down with this tax scheme that is nothing more than a financial circle-jerk?
The real joke of it is that $AIG is using the money they are “saving” from not paying taxes to the US Gov’t, to buy shares from and to pay back….the US Gov’t. The worst part is everyone here knows that. Warren is just playing politics in her run for office…sad but true. She made her name trashing everything the Treasury and Fed did in ’08-’09 despite never having to make, you know, a decision that actually mattered and that horse has gotten her to this point. She is going to ride it to the end no mater how twisted it gets…
Barofsky, TARP’s former inspector general, believes the government is doing AIG—and itself—another favor by permitting the company to repurchase its shares at $29 each. Selling at that price allows Treasury to claim a profit on the government’s investment, based on its cost of $28.72 a share. The department calculated its cost by dividing the $47.5 billion in TARP funds AIG received by the 1.66 billion AIG shares it held before winding down its stake. Matthew Anderson, a Treasury spokesman, says the price is appropriate because it covers the government’s cost in acquiring the shares.
Barofsky calls the price “a political manipulation of numbers.” He argues the calculation shouldn’t include 563 million AIG shares that Treasury received from the