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Physicist, Startup Founder, Blogger, Dad

Tuesday, September 11, 2012

AIG accounting

It looks like Treasury will make a profit on its AIG bailout stake. As I emphasized in 2008, markets were clearly not pricing credit-related assets properly during the crisis. Strong EMH supporters take note (see also here).
NYTimes: ... The Treasury Department announced it planned to sell $18 billion of its A.I.G. stake, putting it on a path to actually turn a profit. It was a remarkable feat and one that nobody — including Treasury Secretary Timothy F. Geithner — anticipated four years ago at the peak of the crisis during the $180 billion bailout of the company.
"Nobody"? -- not so fast! Here's what I wrote in 2008:
If -- and it's a big if -- AIG's actual CDS payouts are limited, the government and taxpayers stand to make a lot of money over the next 3-5 years. When markets return to normal the profitable ordinary insurance parts of AIG can be liquidated to pay off the bridge loan. In that scenario the big losers are AIG shareholders -- the government, as the lender of last resort, will have bought a distressed AIG for a song.
More AIG stuff here. Misuse of EMH arguments can hurt your brain.

8 comments:

Richard Seiter said...

I have trouble understanding how anyone can believe the strong version of the EMH given the empirical evidence (it seems to me the only way it is true is if you treat it as a tautology: "the value of an asset is whatever people are willing to pay for it at the time."), I'm not sure the shareholders can be viewed as the losers from the bailout (unless a bankrupt AIG would have sold--at the time--for more than the government "paid" or AIG could somehow have muddled through without giving up even more value). Wouldn't the real losers be whoever else would have purchased the assets of a bankrupt AIG for even less than the government paid? This seems to me one of the areas where government can be a positive force--stepping in and making investments with positive payoff when no one else is able or willing to do so (e.g. extremely large investments like the interstate highway system). The problem is getting it right (an extremely hard problem fraught with human error and conflict of interest).

MtMoru said...

Look at AIG's share price history.

Richard Seiter said...

Not sure if this is directed at my comment or not. Obviously it cratered. The AIG shareholders lost. The question is whether they lost because of the bailout. My contention is the bailout was not the cause of their loss (the causes would be the financial crisis and the AIG decisions that led to it being susceptible to the effects of the crisis). This is an arguable contention (and I made some qualifications in my post). I would be interested in criticism of my point from those more knowledgeable in this area.

David Backus said...

EMH? That's the best you can do? Haven't seen that since the 70s in my world!

David Backus said...

Should have added this link to a lovely graphic:
http://www.npr.org/blogs/money/2012/09/10/160886823/where-the-bailouts-stand-in-1-graphic

SethTS said...

Another take on how "profitable" the AIG "trade" was for the US Govt:


http://www.interfluidity.com/v2/2587.html

LondonYoung said...

How would the economics look denominated in gold? silver? copper? wheat? corn? etc...
Run the QE printing press long enough, and even housing will achieve new highs ...

Accounting Newark said...

Positively very nice post.....very helpful.............

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