• 11 Sep 2012 at 11:34 AM

How Much Did The Government Make On AIG, Anyway?

AIG priced a giant stock offering last night at $32.50, making the government rich. A really really simple question you could ask about AIG is “how’s the government doing?” and I Googled around for the answer yesterday and got increasingly frustrated, then angry, then drunk. Why can’t someone tell me that? The answer has to do I think with competing interests and secrecy and embarrassment and innumeracy both real and tactical, and I could write a book about it but won’t.1 Instead, I will just tell you how the government is doing on AIG, and then you will know.2

  • The government has gotten back $12.3 $15 billion more than it put into AIG so far, plus it has about $10bn $8 billion worth of AIG shares left over. (This is what the government says too, to within rounding error.) [Update: revised for greenshoe exercise.]
  • So, great!
  • Its IRR is 3.2% 3.9%, or 5.7% if you assume it sold the remaining AIG shares today (which: it didn’t).
  • If you assume the government’s cost of capital for the bailout was 3.04%, or roughly 5-year Treasury rates as of the time they signed on to this almost 5-year bailout, then the government’s made an economic profit (returns in excess of cost of capital) of $600 million $3 billion, or $9.9 billion including the remaining AIG shares.
  • If you assume the appropriate discount rate for the bailout was 12%, or roughly what AIG’s initial Fed credit facility paid, then the government has undercharged AIG by about $26.3 $24.6 billion, or $19.7 billion including the remaining shares.
  • Neither is a good assumption.3
  • The end.

Here’s a chart:

Here is the math. Here is a footnote with sources, caveats, instructions for correcting errors, etc.4

Here is one speculation: Hank Greenberg? The government is more or less out with what looks like a pretty modest profit for saving his company. How does that influence whether you think he should win his lawsuit saying that the government unfairly diluted him out of a perfectly healthy AIG? Some people think there’s something to that suit, but to really feel for him you need to think that the government got a really sweet deal on its bailout. On the evidence so far – which is basically all of it – that doesn’t seem especially true.

A Horrible Spreadsheet [Google Docs]
Treasury sells big chunk of AIG stock at a profit [Reuters]
Plot Twist in the A.I.G. Bailout: It Actually Worked [DealBook]
$182 Billion Commitment to AIG During Financial Crisis Now Fully Recovered After Pricing of $18.0 Billion Treasury Common Stock Sale [EDGAR]
Overall $182 Billion Committed to Stabilize AIG During the Financial Crisis is Now Fully Recovered [Treasury]

1. As of this morning the situation is better, with a nice overview accounting from the government in the AIG press release itself [update: and this very nice set of pictures from Treasury]. Some other useful efforts include this paper (no math but lots of bailout details), this GAO report, this ProPublica accounting (Treasury only), this Treasury accounting (Treasury only), and the Fed’s disclosure (Fed only and … diffuse). Unsatisfactory efforts include calculations of “breakeven prices,” all kinds, and SIGTARP’s weird efforts to partition TARP from non-TARP and bang on about TARP losses even when they’re Treasury gains.

2. Also if you know someone who’s already figured this out and put it online in a user-friendly way:

  • don’t tell me, because I wasted a lot of time and anger on this and am not sure I could take it, and
  • tell the person who’s already figured it out to improve his/her search engine optimization. My inbox is full of promising SEO leads if s/he needs a recommendation.

3. However: I like discounting at 12% because, at the moment that the government committed to the bailout, that’s what it was charging on its 2-year loan commitment. Plus 80% of the equity but whatever. I don’t think anyone at the time thought 12% was too high, except maybe Hank Greenberg and probably not even him. If you’re discounting these cash flows at less than 12% I think you need a reason. (The fact that some of them are collateralized, etc., is a plausible one.)

4. If you think I’m wrong read this note then email me. But read the note first.

Basic methodological question number 1: What is the government? I started with “programs special to AIG,” meaning the Fed credit facility and a few related lines, the Treasury bailout that restructured it, and Maiden Lanes II and III. So not, in particular, the commercial paper program, which AIG partook of. But also not, like, low fed funds rates or whatever. I don’t think that those things are as bailout-y as the specific AIG lashings of money. You disagree, that’s fine. I also don’t count AIG’s ability to deduct losses for tax purposes as a bailout – again, not special to AIG – despite the fact that the bailout changed rules that would have wiped out those losses without the rule changes. That doesn’t sound like extra bailout to me, but if it does to you – and it does to Andrew Ross Sorkin [update: or did in February; this is a bracing riposte from the broad-view-of-bailouts school of thought] – then have at it.

Basic methodological question number 2: Commitments or cash flows? My aim here was to measure actual disbursements of cash by the Fed or Treasury, not undrawn commitments. As a matter of credit risk this is aggressive – the government was on the hook for all committed amounts – but as a matter of calculating IRRs it seemed easier. I am somewhat ashamed of this choice.

One other source of shame is that I am not rigorous about “maximum amounts outstanding” – when one program replaces another I have two separate line items, which means that when the Fed says its maximum commitment was $112.5bn and I have a total of $172bn for them, it comes from combining maxima for each separate item. Theirs is philosophically better but, again, mine makes it easier for my feeble brain & spreadsheet to calculate IRRs.

Ooh, more shame: many items are glommed into the last months of quarters (because disclosed in quarterly reports) rather than digging through (often non-existent) contemporaneous sources to find exactly when they happened; this makes IRR and NPV calcs necessarily imprecise but cash flows are accurate to within a quarter.

Finally, sourcing is I think adequately explained in Column BE of the “Horrible Math” tab of the spreadsheet. The spreadsheet is intended to be … um … not quite intuitive, but close.

115 comments (hidden to protect delicate sensibilities)
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Comments (115)

  1. Posted by Im_a_Dude | September 11, 2012 at 11:36 AM

    footnotes are bigger then the post (not including charts)

  2. Posted by Jay | September 11, 2012 at 11:36 AM

    It's finally happened. The footnotes are longer than the article.

  3. Posted by Guest | September 11, 2012 at 11:40 AM

    The footnotes have become self aware!! They will soon launch an attack!!

  4. Posted by Guest | September 11, 2012 at 11:43 AM

    Got a little looser with the tags too.

  5. Posted by Guest | September 11, 2012 at 11:44 AM

    Matt's really coming into his own here.

  6. Posted by 2 cubes over | September 11, 2012 at 11:48 AM

    I love it when Matt posts spreadsheets.

  7. Posted by guest | September 11, 2012 at 11:57 AM

    Does nobody have anything interesting to say about this article or are people genuinely interested in Matt's formatting choices?

  8. Posted by Bugs | September 11, 2012 at 12:06 PM

    The latter, especially since he seems to have gone footnote happy with the new format.

  9. Posted by Guy | September 11, 2012 at 12:08 PM

    thanks, I actually read this one

  10. Posted by Baa3- | September 11, 2012 at 12:08 PM

    definately the latter.

  11. Posted by 2ndYearSummer | September 11, 2012 at 12:09 PM

    Not even kidding, I was actually looking forward to reading a Matt post about the AIG bailout.

  12. Posted by Guessed | September 11, 2012 at 12:10 PM

    Very interesting format choice, Matthew.
    Article word count: 378 (including "here's the chart").
    Footnote word count: 624.

  13. Posted by HAM05 | September 11, 2012 at 12:10 PM

    you new?

  14. Posted by Captain Scott | September 11, 2012 at 12:11 PM

    Going in the right direction.

  15. Posted by guest | September 11, 2012 at 12:12 PM

    yeah, definately*

    footnote sectioin:
    *spellcheck

  16. Posted by Guest | September 11, 2012 at 12:12 PM

    If you have anything interesting to say meet me at Minetta's. I'll be the guy furiously trying to figure out cell S62 in the Excel version of the downloaded spreadsheet.

  17. Posted by SWOT guest | September 11, 2012 at 12:13 PM

    cant answer, too busy reading footnotes

  18. Posted by pazzo83 | September 11, 2012 at 12:14 PM

    What do you mean by "cost" of capital?

    - Government of Japan

  19. Posted by pazzo83 | September 11, 2012 at 12:25 PM

    I think we should have more comments on how the footnotes are longer than the article.

  20. Posted by Guest | September 11, 2012 at 12:31 PM

    What footnotes?

    – RBS Data Analytics Quant

  21. Posted by pazzo83 | September 11, 2012 at 12:36 PM

    "I Googled around for the answer yesterday and got increasingly frustrated, then angry, then drunk"

    What is, a normal day for a Knight algo developer when he runs into errors in his code?

  22. Posted by A. Merkel | September 11, 2012 at 12:38 PM

    What do you mean by cost of 'capital?'

    -Almost every Euro Government

  23. Posted by guest | September 11, 2012 at 12:39 PM

    not going to write a book? too late.

  24. Posted by A NEW FAN | September 11, 2012 at 12:40 PM

    MATT BRAVO

    BULLET POINTS MAN.. THIS IS GREAT.. GOOD CONTENT!!!!

  25. Posted by Im_a_Dude | September 11, 2012 at 12:47 PM

    dear NEW FAN,

    we don't post in ALL CAPS here.

    thanks,

    the rest of us.

  26. Posted by Guest | September 11, 2012 at 12:47 PM

    Why even bother with the article anymore. Not that I ever did.

  27. Posted by pazzo83 | September 11, 2012 at 12:47 PM

    Just press one more time. Thanks.

    - Caps Lock

  28. Posted by Guestest | September 11, 2012 at 12:54 PM

    +1

    I was reading the Dealbook article in the NYT, thought, "huh, this doesn't really answer my questions" and knew exactly where to check. Thanks Matt!

  29. Posted by Donald | September 11, 2012 at 12:56 PM

    The club went further than the ball!

  30. Posted by Guest | September 11, 2012 at 12:57 PM

    The more I read of Matt's articles, the more I realize I don't know shit.

  31. Posted by Duncan | September 11, 2012 at 1:28 PM

    those might be the best footnotes ever.

  32. Posted by Beerio | September 11, 2012 at 1:28 PM

    So basically you're saying the AIG bail-out profits paid for about half of the GM bailout losses?

  33. Posted by ThxRgds | September 11, 2012 at 1:28 PM

    Matt I'm so impressed you got drunk while researching this, that is really cool, thanks for pointing it out.

  34. Posted by Guest | September 11, 2012 at 1:39 PM

    looks like that CFA lvl 1 is really coming into fruition here

  35. Posted by guest | September 11, 2012 at 1:42 PM

    Well what do you know, he did use bullet points! We can use someone with your attention to detail.

    - UBS HR

  36. Posted by guest | September 11, 2012 at 2:07 PM

    And I'm a lazy PoS.

  37. Posted by Guest | September 11, 2012 at 3:29 PM

    Haven't y'all read any David Foster Wallace. Outsized footnotes make great literature.

  38. Posted by A NEW FAN | September 11, 2012 at 3:35 PM

    the name is A NEW FAN.. NOT NEW FAN

  39. Posted by Anonymous | September 11, 2012 at 3:39 PM

    900

  40. Posted by gust | September 11, 2012 at 4:14 PM

    is anyone else picturing a UBS intern counting each word in the browser rather than ctrl+c, ctrl+v into a word doc?

  41. Posted by David Foster Wallace | September 11, 2012 at 5:25 PM

    Hey!

  42. Posted by guest | September 11, 2012 at 5:48 PM

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    - Government of Germany

  43. Posted by Dave Chappelle | September 12, 2012 at 12:22 AM

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  44. Posted by Dave Chappelle | September 12, 2012 at 12:24 AM

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