What If the AIG Deal Turns Out to Make US Money?

Last Updated Jan 20, 2010 11:48 AM EST

All the trash talk by Congress and the media about the American International Group bailout is based on the presumption that we'll lose money on the deal. But what if AIG actually turns out to make money for the Treasury or, as Federal Reserve Chairman Ben Bernanke predicts, at the very least, be completely paid off by September 2013? There are small but tell-tale signs it could happen.
Those that follow AIG remember it as the world's largest insurer, a trillion-dollar company caught in a credit squeeze and starved in the midst of plenty. It juggled its assets between literally hundreds of companies, and when the rating agencies lowered the boom on its billions in credit default swaps, it couldn't pay off ravenous counterparties such as Goldman Sachs and Deutschebank.

But let's not forget that the assets are still there; they just have to be priced, sold, spun off, or kept as ongoing concerns. One of those assets is its Asian life insurance unit Alico, which MetLife, according to published reports, is prepared to buy for between $14 billion and $15 billion. That deal alone would reduce the $60 billion owed the government in TARP bailout money by $9 billion.

Extrapolating AIG's other assets on the block, such as its other Asian life insurer AIA, which may list in Hong Kong, also leads to higher values.

According to Bloomberg News, MetLife's original offer for Alico in February was a mere $11.2 billion. So if the real value is $15 billion, that means a price rise for Alico of 34 percent just for waiting 11 months while the life insurance market improved. Not a bad return on investment. And bear in mind that AIG already sold about $12 billion of non-essentials, and hasn't even gotten to the big stuff.

And here's another piece of good news. The Financial Times reports that AIG's portfolio of collateralized debt obligations, the ones the Fed bought in the deal and placed in special purpose vehicles called Maiden Lanes, have risen dramatically from $30 billion in 2008 to about $45 billion, an almost 50 percent increase in value as credit markets improved. And they are throwing off cash, the FT claims.

So it would appear that, like a rich uncle, AIG can make money by doing nothing and letting its investments grow. But not so fast. The basic insurance company still has problems in core businesses like property casualty insurance that aren't going away. In fact, they are likely to get worse, as Congress investigates the "bad deal" that Treasury Secretary Tim Geithner and the New York Federal Reserve made to keep AIG afloat in a hearing on January 27. But this latest news at least gives Geithner a fighting chance.

  • Ed Leefeldt

    Ed Leefeldt is an award-winning investigative and business journalist who has worked for Reuters, Bloomberg and Dow Jones, and contributed to the Wall Street Journal and the New York Times. He is also the author of The Woman Who Rode the Wind, a novel about early flight.