AIG is still costing taxpayers


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Elizabeth Warren helped establish the Consumer Financial Protection Bureau and is a U.S. Senate candidate in Massachusetts. Damon Silvers is director of policy and special counsel to the AFL-CIO. Mark McWatters teaches taxation and directs the graduate programs at the Southern Methodist University Dedman School of Law. Kenneth Troske is chair of the economics department at the University of Kentucky. They served on the Congressional Oversight Panel established by the Emergency Economic Stabilization Act of 2008.
When the U.S. economy was in crisis in October 2008, Congress passed a $700 billion bailout of our financial system. The Troubled Assets Relief Program (TARP) was heavily scrutinized in the media and passionately debated on Wall Street and Main Street. Congress created a bipartisan committee — on which we served — to oversee the funds distributed through TARP. The committee conducted dozens of public hearings and produced 30oversight reports.

Compare that experience with a recent event. AIG, a massive insurance company that received $182 billion in TARP and Federal Reserve bailouts during the financial crisis, reported in February that it had earned $19.8 billion in the fourth quarter of 2011. Its profits increased a staggering $17.7 billion — from a loss of $2.2 billion a year earlier — because of special tax breaks from the Treasury Department.
Yet there was no congressional debate, no front-page story, no special oversight committee. What happened?
When filing tax returns, companies must report whether they have turned a profit or lost money. If they have made a profit, they must pay the appropriate taxes. On the other hand, if they have suffered a loss, they may “carry forward” that loss to reduce future tax bills.
A company that loses $100 million in one year and profits $500 million the following year will pay taxes on only $400 million of the profit, thanks to the reserved tax loss. That $100 million tax loss “carry forward” has clear monetary value: At today’s corporate tax rate of 35 percent, a company could reduce its tax bill by $35 million.
The basic concept of carrying forward past losses is an important feature of U.S. tax law, but it opens a potential loophole. A business that wishes to lower its taxes might acquire companies with enormous past losses just to minimize its tax burden. To prevent this, U.S. tax law since 1986 has limited carry-forward losses when a company changes ownership.
To be sure, the American International Group suffered huge losses. The company hemorrhaged billions of dollars in late 2008, and it was rushing toward bankruptcy. AIG survived only because U.S. taxpayers pumped in funds and acquired majority ownership of the company. Absent this assistance, it is highly likely that AIG would have been broken into parts and sold to the highest private-sector bidders — and had that happened, it is highly unlikely that the company’s losses would have been permitted to carry forward.
By any reasonable definition, the company changed ownership: A controlling stake passed from its stockholders to the federal government. As such, AIG should have been limited in rolling over past losses. Beginning in 2008, however, the U.S. Treasury jumped in with a special ruling that the financial rescue did not constitute a change in ownership. AIG was thus permitted to preserve its pre-bailout losses on its books, and now the company is using those losses to show enormous profits and dodge the taxes it owes on the billions it is earning today.
This is wrong. At first glance, it may appear that the federal government comes out even because it owns AIG stock and benefits as a stakeholder. But the government owns onlyabout 70 percent of the company, while the deal subsidizes all shareholders, including the private parties that own the remainder. Creditors also benefit because a more profitable company is less likely to default on its loans.
In addition, the special tax deal permits AIG executives to collect more. Chief executive Robert Benmosche owns millions of dollars in AIG stock options and receives an enormous direct benefit from this deal. This special tax deal also masks the true cost of TARP by increasing the value of the government’s AIG stock at the expense of future tax revenue.
The Congressional Budget Office estimated in December that even without the special break, taxpayers will lose $25 billion on AIG. That’s more than the cost of two new-generation aircraft carriers (at $11.5 billion each). It is time for our country to put this chapter behind us — and past time for AIG to compete on a level playing field.
When a company accepts a taxpayer bailout to stay in business, it ought to follow the same tax laws followed by companies that aren’t bailed out. In its ongoing efforts to reform corporate tax law, Congress should close this egregious loophole and prevent AIG from continuing to receive a stealth bailout every time it files its taxes. This amounts to a bailout without oversight, without accountability and, quite likely, without most Americans even noticing.

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8:02 PM GMT+0900
It was a political decision to save AIG as it was a political decision to save GM and Chrysler. On the other hand, it was a political decision to allow companies such as Bear Sterns to fail. This is an old news story. Anyone and everyone who paid any attention to either what was done to save some companies or to allow some companies to fail knew that they either good all sorts of goods - the saved companies - or were simply not given favored status and allowed to survive. The idea that someone as able as Elizabeth Warren did not know what was going is is simply ridiculous.

The story that people should be paying attention to is how many tax breaks are given one way or another in the tax code. Best guess is north of 1 trillion dollars and could easily exceed 1.3 trillion dollars. In this world, the money given to AIG is chump change.
5:15 PM GMT+0900
It's more interesting.
According to a 2002 Economist article:
'According to AIG's proxy statement, the only block of shares of more than 5% of the company is a 14% stake, worth $26 billion, the ownership of which is impenetrable. This stake plays a crucial role at AIG in both compensation and control....AIG's proxy gives its home as a Bermuda post-office box, yet according to the company's thin file in Bermuda's registry, the true home is another box, this time in Panama. In other words, the ownership structure of America's second-largest financial institution is, for all practical purposes, immune to many aspects of American law and taxation.

may be firewalled. So we don't really know who benefits from AIG; all we do know is that they have serious friends in the US treasury
4:57 PM GMT+0900
To the authors: Actually, several of us DID notice. What do you guys use for an alarm clock? A cannon?
4:28 PM GMT+0900
ONLY about 70%? I thought "only" stopped at 10-15%.
3:50 PM GMT+0900
Saving AIG was a huge mistake. We missed our big chance at the hundred year housecleaning.
1:15 PM GMT+0900
This argument is dumb. One can argue that the 30% didn't change ownership.
1:10 PM GMT+0900
A company can carry all its loss to the next year? How come I can only carry forward $3000 each year on my stock losses? I thought corporations are persons. How come?
1:07 PM GMT+0900
Yes, we all know the bailout of AIG cost taxpayers money, but so did the bailout of GM. The one that benefited the most is the union UAW. Maybe the AFL-CIO guy can address that part too.
12:20 PM GMT+0900
It is touching to see how Warren clings to charming old-fashioned notions of fairness and justice, refusing to recognize what America and the world have become (where the Golden Rule applies: those with the gold make the rules).

I'm not sure if her views would be refreshing or annoying in a Senate filled by millionaires whose pockets are lined by those they supposedly regulate. While it's noble to fight a good though hopeless battle, at some point you have to deal with and recognize the world as it is. America today is best described as social Darwinsim - if you aren't on top, you deserve to perish and be exploited. Deal with it.
7:52 PM GMT+0900
Deal with it by rolling over and allowing those on top to continue screwing you? Or maybe fight back by trying to avoid the screwing? That's what Warren's trying to do. You go ahead and knuckle, since you've dealt with it and given up.
12:15 PM GMT+0900
As Emily McMahon said in a recent blog post, this presents an incomplete picture and glossed over a number of central facts when describing how federal tax laws were applied to companies that received government assistance during the financial crisis. For the facts, I suggest reading
Erika Gudmundson, US Treasury Department
12:12 PM GMT+0900
Just to clarify as some commenters have refuted my fact that geithner was instrumental in the bailout under the bush that time he was head of the NY Cnetral Bank and obviously with the blow up on wall street he was an integral part of bailing out the very same crooks that trashed the whole economy and many countries economies around the world ...and still not one significant indictment and still the financial crooks are not re-regulated ala Glass-Steagall and more ...and today these very same crooksters are much bigger than too big to fail back then!

PS! Both parties are to blame for this ongoing financial debacle and as well for not doing what is needed to protect against its happening again...and dodd-frank is a watered down joke on Americans.

Previous post-

PROOF Geithner was instrumental in the bail out under Bush- matter of fact if you know the facts he, bernacke and paulsen were know as "the committee of three"...

Wikipedia link- 

"Geithner's position includes a large role in directing the Federal Government's spending on the late-2000s financial crisis, including allocation of $350 billion of funds from the Troubled Asset Relief Program enacted during the previous administration."  
1:48 PM GMT+0900
I agree with ticked
12:09 PM GMT+0900
As Emily McMahon said in a recent blog post, this presents an incomplete picture and glossed over a number of central facts when describing how federal tax laws were applied to companies that received government assistance during the financial crisis. For the facts, I suggest reading
Erika Gudmundson, US Treasury Department
12:14 PM GMT+0900

Thanks...tried the link and it isn't valid.....
12:16 PM GMT+0900
11:54 AM GMT+0900
The authors allude that for all practical purposes that AIG changed hands and would have if they went through bankruptcy. HELLO, what about GM, they actually went through bankruptcy & did change hands. They still got a waiver from our good ole Govt to keep the loss write off. Funny, the AFL-CIO co-author didn't want to point out a more relevant example of his whole thesis. AIG's bailout was BS, but this article is dishonest in not using GM as THE POSTERBOY for carry forward losses and special interest.
11:46 AM GMT+0900
Time for Obama to get rid of Tim Geithner and the rest of the Goldman Sachs gang and tell AIG that the rules have changed. Too bad our entire government, from the White House on down, Democrats and Republicans, are totally owned entities of the financial industry. Why else do the Republicans keep protecting the "borrowed interest" tax status of investment bankers that lets them get away with only 15% taxes on the fees they earn for doing their job? Corruption, plain and simple. A disaster for our country. The CEOs of corporate America are laughing at us poor folks all the way to the bank.
4:18 PM GMT+0900
Yours is a grimly amusing perspective, analogous to insisting that a tenant "get rid of" his landlords, or that a flea get rid of its host.
11:40 AM GMT+0900
Thanks for the information. The whistleblowers who wrote this are doing an excellent job.
The ruling of the Treasury Department dates from 2008 so it was made by the G W Bush administration. Why hasn't the Obama administration reversed this to make the taxpayers recover more money from the profits that have accrued to AIG and other companies that were saved!
Maybe the light shed on this by this column will make that happen.

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