geithner

Treasury's AIG tangle

May 11, 2011: 11:32 AM ET

Has Tim Geithner run out of bailout magic?

The government is on the verge of selling some AIG (AIG) shares for the first time since its 2008 rescue of the insurer. Offering papers filed Wednesday show taxpayers should reap some $6 billion from the sale, which will take Treasury's stake in AIG down to a piddling 77% from 92% now.

Tangled

But the yearlong plunge in AIG's stock price (see right) means a happy ending in this $182 billion saga is looking considerably less likely than it did just a few months ago.

The feds were on a roll as 2010 ended. First Treasury sold a big chunk of General Motors (GM), and then it cashed out of an even bigger bailout, Citigroup (C), at a $12 billion profit. This was unexpected, let's say. Then another upside surprise came as AIG stock embarked on an unlikely year-end rally that took it briefly above $50 a share.

But that rally fizzled, and with it the hopes of an easy bailout from this bailout. With AIG shares trading Wednesday at $31 – down from a year ago, let alone from the recent highs -- the government stands to sell shares not far above its breakeven point of $28.73.

A breakeven sale alone is not a big setback, obviously. Policymakers are less interested in making money on their share sales than in getting the government out of the bailout business as soon as possible. Any transaction that reduces Treasury's stake by 200 million shares is a winner from that perspective.

But the plunge in AIG's shares, even as U.S. stock market indexes close in on their bubble-era highs, could saddle the government with some unpalatable choices in the months and years ahead.

If AIG's condition improves and its stock stays within hailing range of the breakeven point, the government can keep selling, even at small losses, and make the case that the operation has been a success. Few would have guessed two and a half years ago that there would be any chance of getting out of AIG whole, after all.

But if AIG takes further hits on its insurance operations – which seem to have been massively under-reserved during the supposedly halcyon Hank Greenberg era – or if its profits otherwise fail to bounce back, the stock could fall sharply even from here. And that could leave the government with two unpleasant options: Keep selling and let the losses (and the anti-bailout yelling) mount, or hold on and cross your fingers that the tide will turn.

And of course there is also the prospect that a frothy-looking stock market will itself turn lower. This probably would not be good news for an also-ran insurance company that is so desperate for income that it tried recently to buy back the securities that nearly bankrupted it in the first place.

Other things could happen, of course. Maybe there will be a massive stock market rally and AIG will return to the $50s. Perhaps the U.S. economy shake off its malaise and everyone's growth outlook will get bumped up. Possibly the politicians will get their act together and end the worries about the U.S. spending picture.

But none of those outcomes look very likely, which is going to leave Treasury with 1.4 billion shares of a mediocre insurance company and a clock ticking more loudly by the day. Bailing out of a bailout, we're finding this year, is not for the faint of heart.

Posted in: , , ,
  • Washington's debt ceiling terrorists

    Not everyone is persuaded that cooler heads will prevail before Washington hoists itself by its debt ceiling petard.

    When he hasn't been calling the whole mess ridiculous, Treasury Secretary Tim Geithner has been saying lately he is confident Republicans will increase the debt ceiling. That is, as you know, legislative artifact that gives the leading lights in Congress a richly deserved chance to pretend they don't approve of the deficit spending they have spent MORE

    - Apr 27, 2011 2:06 PM ET
    Posted in: , ,
  • Geithner fails rocket science quiz

    Tim Geithner has raised the time-honored Washington tradition of kidding yourself to a whole new level.

    You may worry about the implications of $4 gasoline on an economy that hasn't exactly been going gangbusters as it is. It's no stretch to say the recent surge in commodity prices could ground an anemic recovery in consumer spending.

    But Geithner fairly throws back his head and laughs in the face of this scourge. Why? Because unlike so MORE

    - Feb 24, 2011 12:57 PM ET
  • Fannie debt fears won't die

    Almost three years after Hank Paulson first brandished his bazooka, the sight of Fannie and Freddie debt is still giving people the yips.

    The government unveiled a plan Friday that it said will result in the eventual wind-down of the government-backed mortgage companies. Officials stressed that the process will take years, and Treasury Secretary Tim Geithner went out of his way to say the administration will in the meantime stand behind MORE

    - Feb 11, 2011 2:35 PM ET
  • Fannie Mae: the long goodbye

    Like it or not, it may be 2018 before we are fully free of Fannie Mae and Freddie Mac.

    The Obama administration released a proposal Friday for restructuring the housing market. It lays out three paths to breaking the U.S. housing finance system's toxic addiction to massive, untransparent government subsidies. Fannie, Freddie and the Federal Housing Administration currently finance more than 90% of mortgages.

    But going from a heavily subsidized system to one that sharply MORE

    - Feb 11, 2011 10:29 AM ET
  • TARP watchdog warns of hidden costs

    Don't count your TARP profit eggs before they're hatched.

    That's the message of a report released Thursday by the top federal bailout watchdog, Neil Barofsky, the special inspector general for the Troubled Asset Relief Program.

    Barofsky's report focuses on the special aid extended to Citigroup (C) during the 2008-2009 financial meltdown. The government recently sold the last of its Citi stock and has been saying taxpayers made $12 billion on the bailout MORE

    - Jan 13, 2011 3:06 PM ET
  • Goldman predicts deeper dollar drubbing

    Hasn't the greenback suffered enough?

    Not by a long shot, say Goldman Sachs economists in a note to clients this week. They estimate the dollar's value would have to drop by another 10% to bring the U.S. trade deficit down to its natural, internally balanced level.

    A call for a further decline in the dollar hardly ranks as a shocker, what with sages from around the globe weighing in daily on the MORE

    - Nov 11, 2010 11:55 AM ET
  • AIG: Treasury's white-knuckle ride

    Does it make anyone else nervous that the government keeps promising the AIG roller coaster won't jump the tracks?

    Treasury reiterated Monday that it expects to make money on its least popular bailout, if it's possible to pick one: the September 2008 rescue of AIG (AIG) and the 274 subsequent restructurings of that arrangement.

    Monday announcement came after AIG said it sold two units, one in an initial public offering and one MORE

    - Nov 1, 2010 2:35 PM ET
  • The runaway Chinese export machine

    The renminbi must rise, or the red hot China trade machine is going to overheat.

    So warns the Council on Foreign Relations, which lays out the argument for a stronger Chinese currency in a blog post Monday that accompanies the nifty graphic to the right.

    That chart shows Chinese export growth has gone parabolic since the global economy started recovering last spring. It hit 40% in the year ended in March, according MORE

    - Oct 25, 2010 10:47 AM ET
  • Watchdog flags Treasury for toxic asset 'confusion'

    A Treasury program to take toxic assets off bank balance sheets was plagued by inconsistency, a government watchdog said.

    Thursday's report from the Special Inspector General for the Troubled Asset Relief Program, Neil Barofsky (right), assesses how Treasury chose fund managers for a high-profile effort to ease the credit crunch.

    The program, known as the Legacy Securities Public Private Investment Partnership, or PPIP, eventually selected nine firms that raised some $30 billion MORE

    - Oct 7, 2010 12:02 AM ET
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.