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.