Bob Arvanitis | Is the US Treasury Really Making Money on AIG?

rcwhalen's picture


Holman Jenkins of The Wall Street Journal reported last week that government may end up making a little money after bailing out AIG.   But my friend Robert Arvanitis of Risk Finance Advisors skewers that fallacy below.  -- Chris


Mr. Jenkins’ error rests on incomplete accounting and incorrect attribution analysis. In Frederic Bastiat’s terms, we have a confusion of what is seen and what is not seen.

Let’s see if we can unpack that a little.

The one unarguable fact is that AIG lost 95% of value. To say that taxpayers “made out” is like finding a little pig iron after the Chicago Fire, or salvaging a few brass fittings from the San Francisco earthquake.

Goldman Sachs exploited AIG’s triple-A rating to arb their own capital rules against insurer ignorance.  It was cheaper for Goldman to “insure” than to hold what bank regulators required for capital.

That’s why ignorance is the right word.  Financial guarantee “insurance” is foolish—who takes all the credit risk for a fraction of the market spread?  Who claims to be that much smarter than the markets?

AIG strayed far outside the safe world of actuarial pricing and into mark-to-market lines ofr risk taking.  Credit risk is not diversifiable like car crashes.  But the hunger for revenue drove AIG further and further away from physical risks and ever deeper into (uninsurable) financial market risks.

So when AIG suffered the inevitable bump, they were unable to react like mark-to-market players.  This is why, never forget, insurers live in the world of book value and actuarial tables.

But note that Goldman was feeding at the parent, not the insurer-level. Goldman had hedges with a non-insurer sub, NOT insurance policies.

So if the government had not intruded, Goldman may have demanded collateral and driven AIG into bankruptcy. But then Goldman would only have a claim AFTER all the true policyholders, down at the operating insurers, were paid.  The US government’s intervention put Goldman first in line.

Finally, we read in crises the “payoff is too great for politicians rationally not to act?”  Say what?

Politicians are incapable of understanding basic accounting, lack all insight into financial forces, and are NEVER economic entrepreneurs.  When politicians enrich themselves at the public trough, that is crime, not entrepreneurship…

Politicians calculate exclusively in votes, not money. Sometimes, in desperation, politicians will listen to Fed or Treasury when they are told “push this button…”  Any upside after that is sheer stupid luck.

Government can only avoid irrational and un-analyzable games of confidence and panic by not exacerbating the risks. In short, the behemoth gets into the bathtub, all the water spills onto the floor, then the behemoth decries a lack of towels.  Instead, stay out of the bathtub.


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fuh Querada's picture

I want to arb too.

onebir's picture

I wish RCWhalen & co would stick to the analysis (which is often valid) & get off the soapbox (boring & largely preaching to the converted on ZH).

But hey, it's election time, and a little Bastiat might help the suitable cronies get the wheel...

Peter Pan's picture

Is there anything at all that the government has mde money on in the last four years? Or even the next four years?

Zero Govt's picture

Correct, the US Govt has never made a dime in its entire miserable existence... and never likely to with the likes of Ray LaHood, the Republican Transport Secretary

if public transport wasn't pissing away enough money it gets worse as he's now banished the need for Cost/Benefit analysis for public transport projects such as moronic city rails, trams and other dinosaur means of transporting ever fewer people at ever greater expense

how about a free market in transport Ray, it does the maths you're too inept and corrupt to bother with and doesn't rip up Citys for white elephant projects?

Squealgies's picture

Joe Cassano should be swinging from the gallows and Treasury should be clawing back every asset he owns. The financial armeggedon of his making makes Jon Corzine look small potato in comparison. Pshaw!

SAT 800's picture

That's exactly correct; but no one even knows who Joe Cassano is; let alone what he did; in detail. Because they don't read books. If you read the book you'll have all the names, dates, and criminal intentions laid out in front of you; for some reason, everything reamains a "foggy, unfocused, mystery", when it's time for the Mass Media to "explain" the credit crisis. There's nothing foggy or uncertain or unknown about it; and yes, Cassano is guilty with criminal intent and foresight.

Muppet's picture

Typos and lack of proof reading undermine the authors credibility.

Money 4 Nothing's picture

In a sense yes, AIG is an aggrogate to sterilize laundered money from Poppy production overseas, just don't tell anyone.  

LMAOLORI's picture



AIG isn't the only one



"Quietly, the Treasury Department is engaged in another bailout of the banks. This time, it’s America’s small banks that are the lucky duckies.

The federal government still holds investments in hundreds of small banks around the country in the Troubled Asset Relief Program, otherwise known as the bailout. In an effort to wind down TARP, the government is trying to sell off its holdings of preferred stock of the remaining smaller banks.

The problem is that the Treasury Department isn’t getting great bids on some of the bank paper, even on the shares of banks with strong profits and strong capital. When the government sold its holdings in MetroCorp Bancshares of Houston this month, the bank itself bought back most of it — at 98 cents on the dollar. Wilshire Bancorp of Los Angeles bought back its paper at 94 cents on the dollar. The Treasury Department sold preferred shares of Ohio-based First Defiance at 96 cents, and Peoples Bancorp of North Carolina at 93 cents. All of these are regarded as healthy.


Who makes up the difference? Taxpayers, of course.

Treasury officials say that is what the market is willing to bear. But the government doesn’t have to sell now, and it doesn’t have to settle for less than a full repayment.

Why should healthy banks or hedge fund investors get a gift so that the Obama administration can score some political points by raising the number of banks that have left the program? For all the generous breaks that the government gave the gargantuan banks in the bailout, they all at least paid TARP back at 100 cents on the dollar. Why shouldn’t the small ones pay 100 cents on the dollar like the big boys?"




A Quick End to TARP Means a Smaller Payoff for Taxpayers


ATM's picture

Why shouldn’t the small ones pay 100 cents on the dollar like the big boys?"

Because when you are trying to get to election day without invoking the credit limit fight again any money you can add to the empty larder pushes that day off a little farther.

Gromit's picture

It just demands on your cost of capital.

When AIG got $180 Billion whatever I figured they were insolvent, dead and done for.

But at zero cost of funds I guess most anything can be made to work. Until it doesn't.

knukles's picture
Q:  "Is the US Treasury Really Making Money on AIG?"

A: No

SAT 800's picture

Yes, it's not really that complicated. What they're making is "Spin"; or propaganda; to make the sheeple feel better.

Tijuana Donkey Show's picture

Q:  "Is the US Treasury Really Making Money on AIG for other people?"

A: Yes

Q: "Q:  "Is the US Treasury Really the Muppet on AIG?"

A: Yes

Fixed that for you. 

Zero Govt's picture

Has the US Treasury made money on anything? 

No Govt Dept makes money, and with career crones like Tim 'motor-mouth running-on-empty' Geithner at the helm nor ever will it