Federal Report: Investment in AIG Bad for Taxpayers

Feb. 8, 2009 – A new report by the Congressional Oversight Panel says the taxpayer-backed U.S. Treasury Department bailout program overpaid financial institutions by about $78 billion and received the least value from its investments in American International Group (AIG) and Citigroup.

The watchdog group says federal officials paid out $254 billion Troubled Asset Relief Program (TARP), which was created recently to bolster struggling financial institutions in 2008. In return, the federal government was given company stocks and warrants worth about $176 billion through TARP.

The panel issued its report on Feb. 6 and said the TARP program unfairly favored poorly performing financial institutions, such as AIG and Citigroup.

“Because Treasury [officials] decided to make all healthy bank purchases on precisely the same terms, stronger institutions received a smaller subsidy while weaker institutions received more substantial subsidies,” the report said.

The report indicates the U.S. Treasury received its worst deals on additional investments in AIG worth $40 billion and in Citigroup worth $20 billion through special provisions created for the struggling companies. For every $100 allocated to the two companies, the federal government received $41 worth of securities, according to the report. Earlier investments in eight other financial institutions viewed as “healthy” returned $78 for every $100 spent.

Comparing the value of the deals with similar ones done through the private sector, the report said a $5 billion investment in Goldman Sachs in September by Warren Buffett’s Berkshire Hathaway immediately returned $110 in for every $100 invested. Researchers based their conclusions on the market values of similar securities immediately after federal officials announced the TARP program allocations.

The declining values of struggling companies like AIG has been felt by company officials as they attempt to repay their federal debt. The insurer has had trouble finding buyers for its more lucrative assets, which have declined in value while their debt loads increased due to investments losses and other factors.

Formerly the world’s largest insurance company, AIG became the world’s most indebted insurer after federal officials in September agreed to extend the company an $85 billion loan in exchange for an 80 percent share of company stocks. Federal officials said allowing AIG to go bankrupt would have a devastating impact on U.S. and international financial markets and later revised lending terms, making it a $153 billion loan with a lower interest rate and longer repayment period.

Under the new plan, the Federal Reserve provided AIG $60 billion in loans and the U.S. Treasury another $40 billion so company officials could buy up preferred stock. Federal officials also approved $53 billion to purchase the company’s risky mortgage-backed assets and other debt contracts.