Monday, March 2, 2009

The Costs of the AIG Bailout

With today's announcement that AIG will get another $30 billion in federal credit, the total cost of its federal bailout has reached approximately $180 billion. The total TARP funding is $700 billion and total Federal Reserve emergency facilities for the financial markets run into the trillions. So $180 billion might not seem like much. However, consider what could be done if it were spent otherwise.

Health Insurance. Let's assume the cost of insuring a family of 4 is $15,000 a year (perhaps a high estimate, but we're being conservative). With $180 billion, the federal government could insure some 12 million families. Many of the uninsured are single. Still, with $180 billion, we could cover most of the 40 to 50 million Americans without health insurance.

Unemployment Compensation. Let's assume the average cost of unemployment compensation benefits are $1,000 a month and that a person receives a year of benefits. That would be $12,000 a year. If we applied $180 billion unemployment comp, we could cover 15 million unemployed people for a year. That might be close all the unemployed we have now.

Mortgage Relief. The cost of helping struggling homeowners is very difficult to estimate since the government still hasn't released the details of how the program will work. But let's make a very rough estimate that assistance would cost taxpayers $30,000 per mortgage. This would include interest rate and principal reductions and other relief. With $180 billion, we could provide relief to the owners of 6 million homes. No one knows for sure how much mortgage relief is needed, but easing the pain for the owners of 6 million homes would surely sooth the housing markets.

Social Security. The Social Security Administration says that the average retirement benefit in 2009 is $1153 per month (equivalent to $13,836 a year). With $180 billion, benefits for some 13 million Social Security recipients could be funded for a year at current average levels. Approximately 41 million people receive Social Security retirements or are dependents of Social Security retirement recipients. So $180 billion would cover a large part of their needs.

National Security. The Air Force's F-22 Raptor, an aerial interceptor that would give the U.S. Air Force command of the skies for decades to come, is the most expensive fighter ever. Current plans call for 183 to be produced, at a total program cost of $62 billion (or $339 million per plane). With 183 F-22s, the Air Force would have to continue to use the 1970s vintage F-15. The Air Force would like many more F-22's, because potential adversaries have aircraft that can match the F-15. President Obama would like to contain defense spending and direct more federal monies toward civilian programs. Let's take $180 billion, and allocate half of it--$90 billion--to cover the entire cost of the F-22 program and also build more planes. The incremental cost of additional planes is very difficult to estimate, given the vagaries of the military procurement process. But publicly available information indicates that $150 million per plane may be a reasonable approximation. At that price, the Air Force could get another 186 F-22s, doubling the its air superiority capability, and we'd still have $90 billion left for whatever else seemed like a good idea.

Auto Makers. GM and Chrysler have asked for an additional $21 billion in loans from the federal government. These requests seem to be on the low side. Many believe that the ultimate cost of bailing out the auto companies, and their suppliers and dealers, may be much greater, possibly up to $130 billion. With $180 billion, we could bail out the auto companies and their suppliers and dealers, and still have $50 billion left. The auto makers directly or indirectly supporting 2 million jobs, and unemployment is closing in on 8 percent. Favoring an insurance company over the heart of America's manufacturing sector is gradually becoming open to question.

The AIG bailout, for the most part, protect's AIG's creditors, especially its credit default swap counterparties. The latter are said to include a number of large European banks. The AIG bailout has been justified on the ground that its collapse would create havoc in the world's financial system. But would the home nations of these European banks simply allow them to collapse? That's extremely doubtful, given the financial sector bailouts that have already been implemented by European governments. Just as the U.S. government isn't going to let the U.S. banking system go under, neither will the Europeans allow their banks to collapse. The U.S. bailout of AIG is, in part, a wealth transfer from U.S. taxpayers to European banks (and perhaps, indirectly, to European taxpayers). Europe is a nice place, with good food and drink, quaint castles, and an abundance of interesting museums. But the European banks and other institutional investors that bought credit default swaps from AIG were consenting adults, and should be held responsible for the credit risks they voluntarily undertook. When you look at what else the U.S. could get for $180 billion, you have to wonder if we are truly getting our money's worth from the AIG bailout. And if so, shouldn't the Europeans have to spare a dime or two for the bailout?

The CEO of AIG has said he wants to ensure the company repays the bailout funds. However, today AIG reported a $62 billion loss for the fourth quarter of 2008, the largest quarterly loss by any corporation in American history. The company also reported a $99 billion loss for all of 2008. With results like these, the prospects of AIG repaying the bailout grow dimmer. And the potential for additional bailout funding for AIG grows. If you've wondered what it would be like to be on a slippery slope, now you know.

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