On the one hand, as we pointed out, the Treasury has from the get go of its ongoing rescue of AIG engaged in continued subsidization of the giant insurer, starting with the all too frequent restructurings of its financings. The net effect was not simply to provide more dough to the AIG, but to put the taxpayer in a worse and worse position. The taxpayer effectively owned AIG, with the first financing secured by all the assets of the company and further holding 79.9% of the equity. The first rule of being a creditor in a troubled company is that you want the most senior position in the capital structure, always. That rule was repeatedly violated with AIG.
The latest until now took place in the pre-IPO restructuring, which looks to have provided a further $6 billion to AIG. Some creative accounting allowed Treasury to claim to the public that the expected losses for TARP accounting purposes were lower, when nothing fundamentally had changed. And if we read the latest, somewhat ambiguous press reports (hat tip reader Hubert, who flagged the issue), it looks like the Treasury’s creative accounting move is at odds with continued leaks at AIG. It appears that the Treasury has given another $2 billion to AIG, at least per Bloomberg and the Wall Street Journal.
First from Bloomberg, “AIG Has $4.1 Billion Charge on Insufficient Reserves“:
American International Group Inc. said higher-than-forecast claims costs cut fourth-quarter profit by $4.1 billion, and $2 billion previously designated to repay its bailout will be used to bolster the property-casualty unit.
The insurer reached an agreement with the U.S. Treasury Department permitting the company to keep $2 billion of proceeds from the sale of Star Life Insurance Co. and Edison Life Insurance Co., New York-based AIG said today in a statement. Funds will be used by Chartis for losses tied to coverage including workers’ compensation and asbestos liability.
The troubling part is “keep”. Unless the Treasury got some form of consideration back from AIG, this sure looks like a gift.
American International Group Inc. said it will book a $4.1 billion charge when it reports results for the fourth quarter, as it adds to reserves at its Chartis property and casualty insurance unit….
AIG also said Wednesday that it signed a letter of agreement with the U.S. Treasury to retain $2 billion of the proceeds from the sale of AIG Star Life Insurance Co. and AIG Edison Life Insurance Co. to support Chartis’ capital.
Now with AIG, a mere two billion must look like mere rounding error, but again, pray tell exactly how this reversal of the TARP payback is being accounted for? We’ve had so much sleight of hand with AIG that nothing would surprise me. And with the Congressional Oversight Panel about to go out of business, any pushback is almost certain to be limited.