Pressure is mounting on the government to revise its bailout of AIG to ensure that taxpayers are repaid as much as possible of the $170 billion lent to the troubled insurer.
Experts warn we shouldn't expect to get much back.
The problem stems from AIG's obligations to its trading partners. So far, the hobbled insurance giant has honored in full its contracts with U.S. and foreign banks. It's paid out more than $90 billion in taxpayer money to keep some of the biggest names in finance from losing money on bad bets linked to subprime mortgages and other risky assets.
As the cost of the rescue swells, experts says it's becoming harder to envision a scenario in which the government could recoup its full investment. Even though the AIG payouts to major banks have angered critics of the bailout, it might be legally impossible to claw back any of the billions already doled out.
"A contract is a contract," said Russell Walker, a risk management professor at Northwestern University. "That money all went to people who bought protection from AIG."
The government agreed to uphold those contracts when it seized control of American International Group in September. It argued that failing to repay the debts of the globally interconnected company could cause catastrophic losses at big international banks, potentially toppling the financial system.
Scrutiny of AIG's dealings with its trading partners comes after revelations over the weekend that the insurer plans to pay out tens of millions in executive bonuses. President Barack Obama on Monday accused AIG of "recklessness and greed." He pledged to try to block it from handing out the bonuses, which AIG insists it's contractually obligated to pay.
Obama's aggressive stance toward the AIG bonuses raises the question of whether the government could also pursue the billions paid to AIG's trading partners. Under growing scrutiny from Congress, AIG on Sunday finally identified those trading partners that indirectly benefited the most from its bailout.
Among the largest recipients, Goldman Sachs received $12.9 billion; Merrill Lynch got $6.8 billion. AIG also funneled billions into foreign banks, including $11.8 billion to Germany's Deutsche Bank and $8.5 billion to Britain's Barclays PLC.
Asked if he'd favor trying to see if those AIG contracts could be broken so the government could recover some of those payouts, Rep. Barney Frank, chairman of the House Financial Services Committee, stopped short of endorsing the idea. But he said "that's something that has to be examined."
"I would want to know the consequences of not paying those debts," Frank, D-Mass., told The Associated Press.
Other critics want the government to go further. They say AIG's trading partners should be forced to take less than 100 percent of the value of their derivatives contracts with AIG. They noted that the protection AIG offered - in the form of complex products called credit-default swaps - was unregulated and that AIG's trading partners knew the risks and should have to assume some losses.
"If you're in Las Vegas, and you leave the casino to go play craps with a bunch of people on an alley way, you shouldn't be able to go to the state and ask for your money back," said Barry Ritholtz, a financial analyst and author of "Bailout Nation: How Corrupt Money Shook Wall Street."
No bailout recipient has burned through more taxpayer money than AIG, which is now about 80 percent owned by the government. A 90-year-old insurer, it was listed as recently as last year as the world's 18th largest publicly traded company. Back then, AIG's stock traded for about $40 a share. Today, you can buy one share for just under a buck.
The government has made four separate attempts to save the company, including a $30 billion cash injection two weeks ago. The latest lifeline came as AIG reported a $62 billion fourth-quarter loss, the worst three-month performance in U.S. corporate history.
AIG's dire reality has raised doubts about the government's claim that it will recoup much of its investment in the company.
The government's plan to get its money back rests on breaking up and selling AIG's profitable units, including its insurance and aircraft-leasing arm. But given the company's financial woes and the depressed value of financial assets right now, experts doubt those businesses could fetch a high enough price today to reimburse taxpayers for the full $170 billion.
AIG could wait a few years, in hopes of selling the assets at a higher price. But by then, taxpayers will be owed an even larger amount, once interest is added in.
Federal Reserve Chairman Ben Bernanke, defending the $30 billion lifeline the government provided to AIG, said earlier this month that the government may eventually be able to "recover most or all" of the taxpayers' investments.
That's a step back from the rhetoric used by Bush administration under then-Treasury Secretary Henry Paulson. Last fall, Paulson said the government's capital injections into financial firms were "investments" that would likely make money.
AIG, meanwhile, expresses optimism. Spokeswoman Christina Pretto said the company's "No. 1 priority is to repay taxpayers."
She said the company expects to repay about $34.5 billion "over the next several months."
It would do so partially with equity stakes in two large overseas insurance companies and partially with securities backed by cash flow from the U.S. insurance business. The government could then sell those stakes to raise money toward the $170 billion it's owed.
Pretto said the Fed is receiving interest and principal payments on $41.6 billion in securities it bought from AIG's business partners to wind down AIG's obligations to them. She said the government should see profits on those investments, which include complex mortgage-backed securities that AIG agreed to insure.
But Mark Williams, a former Fed examiner and finance professor at Boston University, said the AIG wind-down inevitably will cost taxpayers money. And he thinks it will take much more money - perhaps an additional $200 billion - to finish winding down AIG's financial dealings so its core businesses can be sold off.
"No longer can we call it an investment," he said. "We just have to call it what it is - and that's sinking money in a hole."
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