When Will We Get Our Money Back?

The markets cheered as AIG touted a $35 billion dent on its taxpayer IOU. But was anyone watching when they recently borrowed billions more? Nomi Prins on a classic Wall Street shell game.

03.02.10 2:12 AM ET

AIG's $35 billion sale of its Asian division yesterday was announced with great fanfare from Wall Street to Washington. It "enables AIG to realize value on a faster track to repay U.S. taxpayers," said AIG CEO Bob Benmosche. "A major step in the AIG restructuring plan to de-leverage, de-risk and pay back taxpayers," said a U.S. Treasury spokesman.

With such high hopes, a few million taxpayers must all be asking the same question: when are we getting our money back?

Yesterday's AIG sale won't even go to TARP, which has become synonymous with repaying taxpayers.

A fair question, with an ostensibly positive answer. Of the $700 billion originally allocated by Congress under the TARP program, "only" $493 billion was ever deployed. Of this $182 billion has been repaid, leaving $311 billion outstanding, with AIG ($70 billion, according to the latest Treasury reports) and the auto industry (with $78.2 billion) leading the pack. At this payback rate, the tab should be closed by 2012 in time for Obama to take a victory lap and keep Treasury Secretary Tim Geithner out of the firing line, right?

Wrong. Yesterday's AIG sale won't even go to TARP, which has become synonymous with repaying taxpayers. Study the money trail, and it's clear that repayments come through a revolving bailout door that allows firms to pay back one federal perk (TARP) with another one (say, a cheap Fed loan used as capital to drive record trading profits). Or in Detroit's case, a cash for clunkers program (though that really didn't work very well). With AIG, the game has included borrowing an extra $3.1 billion from one NY Fed credit pool to repay $3.5 billion of another. It's the equivalent of taking out a new credit card to repay your old balance. The debt's still there, just rearranged, waiting.

Despite the giddiness of the self-involved, we taxpayers should be careful about counting the bailout payback chickens before they're hatched. First, the AIG deal, even if it goes through, doesn't net TARP anything at all, according to AIG' s press release. TARP is 100 percent taxpayer money, funds approved by Congress and provided by the Treasury Department. It's supposed to be Pavlovian: we hear "taxpayer payback" and are supposed to think TARP and be mentally appeased. But AIG is re-paying the Fed, whose leader has repeatedly stated that what the Fed provided isn't coming from the taxpayer's pocket (though it indirectly does).

Second, the deal doesn't happen immediately, leaving ample time to sour, and AIG to post a few more quarters of losses.

Third, AIG and other financial companies are on the hook to us all for a lot more than TARP.

The flimsiness of the deal itself reflects how much payback risk remains more generally. The buyer, a company named Prudential (not affiliated with the U.S. company of the same name) will pay $35.5 billion for AIG's Asian life insurance business, $25 billion of which will be in cash -which Prudential doesn't have yet. Prudential expects to raise this money in the capital markets by the third quarter of the year, but that's placing a lot of faith in the unknown. The last time Prudential considered buying the AIG unit, a year ago, its former CEO, Mark Tucker only wanted to offer $20 billion for the whole business due to suspicions about its asset quality.

Even it the deal goes through, that $70 billion in AIG TARP money remains due. All told, yesterday's sale would repay just 13% of all the $182 billion in total perks that AIG relies on, and 19% of the $130 billion that it's actually used to survive.

Let's say AIG has another two lousy quarters like the last one in which, despite our help, it posted an $8.9 billion loss. It's going to need some of that incoming capital to bolster its businesses.

That's the bigger problem. The whole premise of TARP was that it would get these companies through their troubles, and into the black, so that they can pay back TARP, and the other federal gifts. Even taking TARP completely out of the equation, the total subsidies that remain deployed or available to the financial sector are roughly $8 trillion. (Including about $3.5 trillion through the Fed, $1.8 trillion through the Treasury department, and $2.3 trillion through the FDIC, in the form of various loan facilities, guarantees and other sundries.)

This number is substantially down from its height of $17.5 trillion, but that's largely because the industry was over subsidized by the federal government to begin with – if you're in the hole $100 and someone fronts you $300, you can repay the original $100, maybe even $200. That doesn't mean you're not a future risk.

The banking sector just came off a record profit and bonus year. It's also subsidized by trillion of dollars of federal support and rather than using that money to grow consumer or small businesses and help out the rest of the economy, it has used one set of subsidies to repay another – like those cheap fed loans provide trading capital to make trading profit to repay TARP.

With so much federal aid still on the table, and as long as huge risks funded by government support still remain in the system, we are still on the hook for future losses, and the potential need for more federal largesse.

Nomi Prins is author of It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street (Wiley, September, 2009). Before becoming a journalist, she worked on Wall Street as a managing director at Goldman Sachs, and running the international analytics group at Bear Stearns in London.