[andrew.bonk]

I am trying to make sense of an article published today (12/11/12) in the New York Times. The main claim of the article is that “With the latest sale, taxpayers have gained about $22.7 billion from a bailout that many predicted would prompt a staggering loss.”

http://dealbook.nytimes.com/2012/12/11/treasury-earns-7-6-billion-from-sale-of-last-shares-in-a-i-g/

Is this an accurate claim? If taxpayers “profited” over $22 billion, can the bailout of AIG be considered worth it? What would the government do with these so called profits?

With all the above in mind, what is the strongest argument against the bailout of AIG, and bailouts in general? Is it the moral hazard created? Is it the unnecessary risk taken by the government with taxpayer money (since private capital was unwilling to do so)? Is it special privilege received by a few at the expense of everyone else?

[jmherbener]

The argument against bailouts is that they supplant entrepreneurial decision making about production in society with political decision making. Entrepreneurs must economize for society at large to earn profits and avoid losses. By turning production decisions over to politicians, standards of living suffer, since their decisions are not subject to the test of profits and losses.

If the government had not bailed out AIG, then the inferior entrepreneurs who drove AIG into bankruptcy would have been supplanted by superior entrepreneurs who built and maintained their capital. Capitalists are the ultimate entrepreneurs in the market economy, funding superior entrepreneurs who earn profits and avoid losses and withdrawing funding from entrepreneurs who do not earn profits and suffer losses. The decisions of the superior entrepreneurs (who would have been put in place by the capitalists) would have been more profitable than the decisions of the inferior entrepreneurs (who were left in place by the politicians).

A rising stock price is no more evidence of a successful bailout than the creation of “green” jobs is evidence of the success of government subsidies to electric car manufacturers. To pass the test of profit and loss, a decision must generate more value in the chosen alternative than the value of the alternative given up.

Finally, the taxpayers will not receive a penny of the $22.7 billion. It will go to politicians who will use it to bid resources away from economizing uses by entrepreneurs in the market into their own inefficient political decisions.

[marcosportillo]

Is the so called “profits” accurate? What of all the toxic assets sold to the Federal Reserve, cents on the dollar? Eventually those losses will be realized. Isn’t the so called profits a bit misleading because of this?

[porphyrogenitus]

I haven’t looked into it, but my guess is that the “profit” is an accounting gymmick that only counts a portion of what AIG really received.

BUT – lets stipulate that, in this instance it really is a “profit.”

What does that prove? Not much, really; – it’s a “statistical outlier” when it comes to government “investments.”

Look, they (“they”) could point to the TVA being a “successful investment of government funds” – how they did that was 1) not count all the subsidies 2) not count the way they stacked the regulatory deck in favor of TVA and against its market competitors and 3) shennanigans.

Now, when it comes to even, say, the executives of Solyndra or LightSquared, *they* turned a profit, even while the firm failed (and they shoveled money into various campaign chests, so it was a success all around!)

But at the foundation of this example is that it only looks at part of the picture; in voluntary exchanges on the free market, we know that all participants in an exchange come out ahead, by their own lights. We also know that the most efficient firms tend (tend) to succeed and the less efficient are weeded out.

But in cases such as this, where a firm is given billions of dollars coercively taken from others, well the fact that the firm advantaged by such subsidies is able to pay back it’s patrons says nothing about the overall social/market gains or losses; a firm that otherwise would have failed or restructured to be more efficient was propped up, at the expense of. . .what? The “what” is invisible. But that “what” may be better firms that would have taken the place of the current market leaders, the ones with a favorable relationship to government (and who now look to government as their “Consumer-is-Sovereign,” because that government is their most important “customer,” bar none. The rest of us? We can go hang).

But lets go back to that “statistical outlier” thing; the fact that some firms are able to use their special relationship with government and funds wrested from people invollentarily in order to rake in the dough at the expense of existing and potential rivals will be used by state officials & their courtiers to say “see? this works! Lets do more of it!” – all the billions upon billions that will never be paid back, all the uncounted failures that are slipped down the memory hole, to the contrary notwithstanding.

The amazing thing, rather, isn’t that AIG was able to give back to its patrons in government. I mean, I would hope that if I had a pipeline to billions upon billions of dollars and an effectively unlimited line of credit to the guys with the money machine, I’d be able to crush market rivals who didn’t have that sweet advantage, and return some of the swag to my patrons. Oh, no – the amazing thing isn’t that this “works” sometimes for the insiders. The amazing thing is how often it fails.

(One guess is: when it “fails” – the Solyndras that outright declare bankruptcy, – it was never meant to “succeed” in the first place. Otherwise, there would have just been another line to free money. Rather, as with any grift, even these “succeed” in the way they were meant to – the grifters just move on to the next racket, and leave the suckers holding the bag. Just ask John Corzine how that works out; millions of dollars, millions of dollars! but for the suckers who trusted him with their money? The bag.)

This is a racket where the club members are winners – but that doesn’t mean the economy as a whole, or the “general public” comes out ahead. And, yes, sometimes they will have “demonstration projects” where the books are finagled so that it looks like the government (which are not all the payers) “came out ahead,” but that’s to keep the suckers lining up for more. Even guys setting up a three-card monty racket on the streetcorner know that you have to let the marks win once in awhile so they keep their interest.

But that doesn’t mean the game isn’t rigged. All it means is that the carnival barkers were given some good materiel to work the crowd with so they’ll be ready for more of the same.

[jmherbener]

The federal government provided bailout funds to AIG of $182.3 billion starting in September 2008. These funds were used to buy toxic assets from AIG and its counter parties. In the initial bailout of $85 billion, $62 billion went directly to counter parties.

http://www.washingtonpost.com/wp-dyn/content/article/2010/01/23/AR2010012302832.html

As a condition of the bailout loan, the federal government demanded an 80% equity position in AIG. When AIG paid back the loan (and the warrants were exercised with the higher share price, if they were exercised) the federal government received $22.7 billion.

http://online.wsj.com/article/SB122156561931242905.html

So the “return” of $22.7 billion on an investment of $182.3 billion is 12.5% over four years. Private entrepreneurs, like Tim Cook, did much better. Society at large would have been better off if the government had left the $182.3 billion in the hands of private capitalists.

[marcosportillo]

So who currently owns the toxic assets? Somebody’s got to suffer the losses of those assets…

[andrew.bonk]

These were very interesting responses to aspects of the bailouts I had yet to consider. So many people are quick to point out the so called successes of various interventions without considering the costs.

The New York Times article praising these bailouts reminds me of Obama’s continued refrain that when he came into office the auto industry was on the verge of collapse and he “saved” over a million jobs. Many of the points made in this thread about AIG also refute the standard version of the auto industry bailouts as well.

[jmherbener]

The losses were realized when the Fed bought toxic assets from banks and other financial institutions paying them cash at face value and putting the assets on its balance sheet. The losses were born by society at large. The investors who were bailed out received new money which they used to outbid others who hadn’t received the new money. These other people bore the loss by suffering a reduced command over resources.

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