AIG Cost Estimate May Be Too Generous, Report Says

The U.S. Treasury Department estimate of losses from the bailout of American International Group Inc. uses questionable methods and may be too optimistic, the Troubled Asset Relief Program’s inspector general said.

The department’s projection that it will lose $5 billion on its TARP investment in AIG “represents a dramatic shift from the $45 billion loss that Treasury had projected in its AIG investment just six months earlier,” Neil Barofsky, special inspector general for TARP, said in a report today. “While AIG’s fortune may have indeed improved during the course of those six months, there is a serious question over how much of this decrease comes from a change in Treasury’s methodology for calculating the loss as opposed to AIG’s improved prospects.”

AIG, once the world’s largest insurer, turned over a majority stake to the U.S. in 2008 as part of a rescue that grew to $182.3 billion. The exit plan converts the government’s preferred stock into 1.66 billion common shares for sale on the open market and taps a Treasury facility for as much as $22 billion to retire Federal Reserve bailout vehicles.

The method Treasury used to arrive at the $5 billion figure, published this month in a report, differs from that used in a loss estimate of $45.2 billion from March, Barofsky said. While the smaller loss figure is based “solely on the recent market closing price of AIG’s common stock,” the March estimate “accounts for a broad range of factors that might affect the value of Treasury’s holdings.”

Transparency

“We don’t believe there’s been any lack of transparency, nor have we changed our methodologies,” Treasury Chief Restructuring Officer Jim Millstein said in a telephone interview.

“The financial statements value Treasury’s investments in AIG based on the fact that we own an illiquid, preferred stock that doesn’t trade publicly,” Millstein said. The report with the smaller loss estimate “valued the AIG position giving effect to the recently announced recapitalization transaction as if we owned common stock. In valuing that common stock, we employed the same methodologies to value the common stock we own in other publicly traded companies.”

Barofsky said that Treasury’s $5 billion loss estimate can’t be used in official audited financial statements for TARP to be published next month.

The watchdog said that Treasury “fails to meet basic transparency standards by failing to disclose that the new lower estimate followed a change in the methodology.” Treasury disclosed its valuation method, Millstein said.

For Treasury to break even on its $49.1 billion investment in AIG stock, the shares must be sold for almost $30. The company traded below that level for more than two months this year, reaching a low of $22.15 on Feb. 8.

AIG slipped 17 cents to $41.39 at 3:33 p.m. in New York Stock Exchange composite trading today. The insurer has advanced about 38 percent this year.

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Hugh Son in New York at hson1@bloomberg.net

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; Dan Kraut at dkraut2@bloomberg.net

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