AIG Bailout’s True Costs to Taxpayers, Innovation, and Competition

The Treasury Department today is patting itself on the back for finally selling some of the government’s shares in American International Group, with Treasury Secretary Tim Geithner breathlessly praising the action as an “important milestone.”

But hold on there, Mr. Secretary. This sale of shares doesn’t come close to what taxpayers have put into AIG, and the government will still have a supermajority stake. The sale of shares should raise $5.8 billion for the federal government — out of $173 billion spent propping it up.

And when this stock sale is over, the government will have reduced its ownership stake in AIG from 92 percent to 77 percent. A company is going from being nine-tenths government-owned to three-fourths government-owned. Big wow!

But even if AIG were somehow to pay every dollar back, that still wouldn’t justify the bailout and takeover. There are a number of “hidden costs” which I have gone over before and will revisit in later posts

Chief among these is, as with Fannie and Freddie, having a government-sponsored behemoth competing against unsubsidized competitors. As then-CEI research associate Jonathan Moore and I wrote last year in an op-ed in Politico, AIG has appeared to use its government backing to slash its premiums below a level commensurate with risk in a free market, putting taxpayers even more at risk and harming unsubidized rivals, which has the long-term effect of slowing innovation in risk management.

As we argued in the piece, AIG is now the “public option” for property and casualty insurance and will continue to distort the market until the government’s exit is complete.