AIG is back in the news,
This time it’s in an analysis by New York Times financial reporter Andrew Ross Sorkin, who follows AIG in his Dealbook column.
AIG, which was bailed out to the tune of $182 billion by the U.S. taxpayer, continues to write workers’ comp coverage through its Chartis division and a web of affiliated companies.
AIG has been paying the U.S. Treasury back, and Sorkin notes that the U.S. government interest in the company is down to 77% from a high of 92%.
Many a California injured worker gets AIG/Chartis checks and benefit notices mailed from Shawnee Mission, Kansas.
How is AIG doing? The international financial and insurance behemoth recently announced a $19.8 billion profit. Sorkin notes that this was quite a feat for a company that was on its death bed several years ago. AIG had insured many arcane financial products, including credit default swaps, and got caught in the downdraft that took out Bear Stearns and Lehman. For those of you who need to find a good read, Michael Lewis’ “The Big Short” is an entertaining and astute tale of those times.
Sorkin scratched beneath the recent hi-fiving over large profits and notes that:
“But if you dug into the numbers, it quickly became clear that $17.7 billion of that profit was pure fantasy — a tax benefit, er, gift, from the United States government. The company made only $1.6 billion during the quarter from actual operations. Yet A.I.G. not only received a tax benefit, it is unlikely to pay a cent of taxes this year, nor by some estimates, for at least a decade.”
AIG benefits from a Treasury tax advantage. Here’s Sorkin on how this works:
“Here’s the back story: A.I.G.’s tax benefit comes in large part from its immense “net operating losses” during its depths of despair in 2008 before its rescue. The government had to dump $182 billion into the company after it was crippled by bad bets it had made insuring mortgage-backed securities.”
Sorkin points out that “The tax benefit comes in the form of something called net operating losses — NOLs in Wall Street parlance — that could be worth more than $25 billion, possibly more. Those losses can be very valuable, in part because companies can spread them over many years to lower or wipe out their income tax bills.”
Sorkin says :”However, according to longstanding securities laws, if a company files for bankruptcy or is taken over, it loses the ability to use its net operating losses. A.I.G. would fit that profile perfectly: on the verge of bankruptcy, the federal government took control of A.I.G., exchanging its bailout billions for shares in the company. The government — taxpayers — still own 77 percent of the company, down from 92 percent three years ago.”
According to Sorkin:”Still, the Treasury issued “Notices” exempting A.I.G. from losing its right to make use of its net operating losses. In total, the insurer estimated those losses were worth $26.2 billion as of 2009, and it claimed almost $9 billion in other “unrealized loss on investments.”
So we essentially have the U.S. Treasury owned AIG exempted from taxes.
Here is a piece by Mark Ramseyer of Harvard Law School in the Harvard Forum on Corporate Governance and Financial Regulation titled “Can The Treasury Exempt Its Own Companies From Tax?”:
http://blogs.law.harvard.edu/corpgov/20 … -the-treas
Although the Ramseyer article focus on General Motors, it deals with the principles that apply to the AIG situation.
From a workers’ comp standpoint it’s a good thing that AIG/Chartis continued to operate. While workers’ comp was never an area of the company that was in any way responsible for the financial debacle, it would have been disastrous for the California insurance market if AIG and its affiliated companies had gone dark.
But is it a bad thing for the taxpayer if the government owned AIG is exempted from taxes?
Here is Sorkin’s analysis:
“All of this brings us to the inevitable questions: How did this happen? Why would Treasury exempt A.I.G. from the law? And if taxpayers own a majority of A.I.G., aren’t we the beneficiaries of the rule-bending?
A Treasury spokeswoman declined to comment, as did a spokesman for A.I.G. However, senior Treasury officials said privately that they had exempted A.I.G. because they did not consider the rescue to be a traditional takeover. The original law preventing companies from using the losses after a takeover were intended to prevent corporations from buying failing companies with lots of losses simply for the tax benefits.”
Sorkin notes: “Moreover, the officials said A.I.G.’s tax benefit would help taxpayers because it would raise the insurer’s share price. That may be true, but that assumes the government is able to sell its shares and exit its investment. That’s still a big “if.” (Though I do bet it will eventually happen.)”