By Deborah Solomon
Only in Washington can one of the stock market's most basic and intuitive laws -- buy low, sell high -- turn into a confusing political fight about the success of the U.S. financial bailout.
The fight revolves around the question of whether the Treasury made a profit with its $6 billion sale, announced yesterday, of stock in American International Group Inc., which it acquired in 2008 as part of the $700 billion Troubled Asset Relief Program. Neil Barofsky, the take-no-prisoners former prosecutor who oversaw TARP, claims the program lost money by selling its shares for $29 apiece. Barofsky, a law professor at New York University, says the feds needed to sell their shares for at least $43.53 to break even.
Not so, claims Treasury. It says the break-even price was $28.73 and taxpayers netted an overall gain.
So who's right? As with so much else when it comes to Washington budgets, it depends on who's counting -- and how they count.
Barofsky's claim that TARP suffered a loss with the lower sale price is technically accurate. TARP originally invested in AIG through preferred stock, which it told Congress had a value of $43.53 per share. But AIG's rescue, which began in 2008 with an $85 billion Federal Reserve loan, has been through multiple restructurings, each of which changed the value and makeup of the government's stake.
AIG ultimately repaid the Fed's loan, and Treasury exchanged its preferred shares for 1.655 billion new shares of AIG common stock valued at $47.5 billion. That changed the equation, bringing Treasury's break-even price down to $28.73.
Why the discrepancy? When Treasury exchanged its preferred shares, it received about 563 million new shares from the Fed. Those shares are held outside the auspices of TARP.
So: Looking strictly at TARP's balance sheet, Treasury's break-even price is $43.53. Ignoring where exactly within the federal government the investment is technically held, however, and looking at the overall value of the government's AIG stake, the Treasury made a small profit Thursday.
James Millstein, an investment banker who oversaw AIG's restructuring for Treasury, says Barofsky is perpetuating a long-held and incorrect view of the bailout. Barofsky was "an early and vocal critic of the Treasury's restructuring plan for AIG," Millstein said. Now he "can't seem to resist the temptation to remind people how wrong he was."
Barofksy says he's never been critical of the AIG restructuring but has questioned Treasury's portrayal of its return on the investment. "If you include what is essentially a gift from the Federal Reserve it comes up in the black," he says. But the question "is whether or not the description of this as a Treasury investment is a fair or misleading characterization."
It's still too early to say whether U.S. taxpayers will ultimately break even on the AIG bailout. The U.S. Treasury still owns about 70 percent of the firm and it will take a year, if not more, to reduce that amount to zero.
We love a good math battle as much as the next guy. But perhaps we should hold off trying to figure out whether AIG was a winner or loser for taxpayers until we can truly calculate the cost.
(Deborah Solomon is a member of the Bloomberg View editorial board. Follow her on Twitter.)
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-0- Mar/09/2012 20:17 GMT