AIG Bailout 4.0: the Tally Mounts (and Gets Murkier)

With AIG bailout 4.0 [1], the U.S. government has finally reached a level of entanglement [2] so impenetrable that it's hard to even put a top line figure on the cost. Fittingly enough, the government's entanglement with AIG is a direct result of the company's entanglements [3] with major world financial institutions.

The new top line number, near as we can figure (see below), is $180 billion. Bailout 1.0 was $85 billion, 2.0 was $123 billion, 3.0 was $150 billion.

With each new version, the government's entanglement has grown while the terms eased [4]. This time around, the government has removed AIG's responsibility to pay dividends on the $40 billion (and soon possibly as much as $70 billion) of preferred stock own by the Treasury, and the Fed has taken a stake in AIG's life insurance subsidiaries, pinning hopes of loan repayment to their fate. (As we've reported, unresolved tax issue could affect the value [5] of one of those subsidiaries.)

Count along with us: to $40 billion of Treasury funds has been added a promise of $30 billion more (which you can now see on our big bailout chart [6]). With that, 20 percent of the total bailout money so far committed by Treasury has been to AIG.

Fifty billion dollars of loans from the Fed dating from bailout 3.0 apparently remain untouched.

Then there's the Fed's $60 billion credit line -- and this is where things get tricky. The Fed is taking a $26 billion stake in two life insurance subsidiaries and using $8.5 billion more to essentially buy another stake (though the purchase is made via a loan, in the Fed's typically convoluted way) in the cash flows from AIG's domestic life insurance subsidiaries. That reduces the credit line to as low as $25.5 billion, but as far as we can tell, the Fed's overall outlay remains as high as $60 billion -- it's just that the Fed and AIG have gotten creative in how that stake will be repaid.

So that's how we get to $180 billion.

In the Treasury and Fed's statement this morning [7], officials paint the move as regrettable, but necessary, with the stress on regrettable:

Treasury has stated that public ownership of financial institutions is not a policy goal and, to the extent public ownership is an outcome of Treasury actions, as it has been with AIG, it will work to replace government resources with those from the private sector to create a more focused, restructured, and viable economic entity as rapidly as possible.

"Rapidly," of course, is a relative term. And given that the main goal is the controlled dissolution of AIG, not reimbursement of the government's investments, there's no telling how much will come back. The Congressional Budget Office estimated in January [8] that more than 50 percent of the Treasury's original $40 billion investment will be lost.