Now It’s Wall Street’s Turn to Help Main Street

a | A

By Deborah Solomon

Four years after the federal government came to its rescue, American International Group Inc. is on such strong footing that the U.S. government will soon become a minority shareholder in the giant insurer. The government may actually recoup its investment of $182 billion.

It's a stunning turnabout for a company many thought would never emerge from the government's grip. It's also a stark reminder that, while Wall Street and Main Street are inextricably linked, they they seem to be traveling in parallel universes lately.

This month marks the four-year anniversary of the darkest days of financial crisis: The collapse of Lehman Bros., rescue of AIG and, a month later, passage of the $700 billion financial bailout (known as the Troubled Asset Relief Program, or TARP). Is it soon enough to render a verdict on the government's efforts?

By one measure, perhaps the only one that matters, the government's unprecedented actions were wildly successful: The financial system, and with it the broader economy, did not collapse. Many banks have returned to profitability and are strong enough to raise capital. U.S. automakers were saved and put on stronger footing. Mortgage giants Fannie Mae and Freddie Mac have stopped sucking money out of the U.S. Treasury.

Cost is another measure: The tab for the financial bailout will ultimately be far less than what many projected during those chilling days in 2008. As someone who covered every twist and turn of the government's rescue (and came to dread weekends, when almost all the action took place) I can attest that, in 2008, no one dared fantasize about the government getting its money back. Treasury officials were just trying to stem the bleeding. When a Republican Treasury secretary gets on his knees and begs the Democratic congressional leaders for a bailout, you know recouping funds is of little concern.

Four years later, the rescue tab is far smaller than what anyone would have predicted. Of the $417 billion in TARP funds that were actually disbursed, Treasury has recouped $353 billion. That number will increase with Treasury's sale of $18 billion worth of AIG stock, a move that will bring the government's ownership stake to roughly 20 percent.

Will AIG ultimately make a profit? The answer depends on how you look at the numbers and how AIG's stock performs. Together, the Federal Reserve and Treasury extended AIG a $182 billion lifeline, involving credit lines, equity purchases and other investments. AIG has already repaid the Fed, with interest, for a $17.7 billion profit, according to the New York Fed. The U.S. Treasury, which invested $67.8 billion in AIG, has so far recouped $44.5 billion through stock sales -- $36.6 billion through sales of AIG purchased with TARP funds and another $7.9 billion from the sale of AIG shares transferred by the Fed to Treasury. That leaves about $23.3 billion left for Treasury to recover, and that number will decrease to about $5.3 billion with Treasury's announcement today that it will sell $18 billion worth of AIG stock.

Until a final share price is set, it's unclear just how many of its remaining 871 million AIG shares Treasury will have to sell to hit $18 billion. With the stock trading about $33, it's likely to dispose of about 550 million shares. That would leave Treasury with about 320 million shares which, at today's price, would be worth north of $10 billion. That could ultimately mean a profit on AIG for the Treasury.

That's an amazing success for U.S. taxpayers, who were on the hook for the bailouts. Unfortunately, it's one of the only financial bright spots for them these days. The U.S. economy has stalled to such an extent that the Federal Reserve is likely to undergo another round of bond-buying to help get credit flowing.

The four-year anniversary of the financial crisis should prompt policymakers to consider using some of the money -- funds that were never expected to be returned to the government's coffers -- to assist those in need. Some 12.5 million Americans remain unemployed, and 40 percent have been out of work for six months or longer. Almost 15 percent of Americans rely on the government for food stamps. The 8.1 percent unemployment rate, while far better than its peak of 10 percent, crept down last month largely because so many people have given up looking for work.

That $353 billion could go a long way toward helping struggling Americans who would benefit from some type of relief -- whether through tax cuts or the extension of benefits. The U.S. taxpayer stepped in to help Wall Street in its time of need. It's time for Wall Street, albeit indirectly, to return the favor.

(Deborah Solomon is a member of the Bloomberg View editorial board. Follow her on Twitter.)

Read more breaking commentary from Bloomberg View at the Ticker.

-0- Sep/10/2012 17:30 GMT