Taxpayers Could Profit From Loan To AIG

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As part of the humongous bailout of insurer American International Group, the federal government will lend the company up to a whopping $85 billion — of taxpayer money.

It may seem like a risky investment, but some analysts say the government is likely to end up making a tidy profit from the deal through interest and stock profits.

Others, like Peter Schiff, author of Crash Proof: How To Profit From the Coming Economic Collapse and president of Euro Pacific Capital, say the government has made a stupid move.

"I think they will lose this money and more. This is not a good use of taxpayer money," Schiff says. "They're flushing $85 billion down the drain. Who knows how much more? I mean, I have no idea how much money AIG is going to lose. But the government is not going to run the company any better than the former management. These are the guys that can't run the post office — how are they going to run a complicated insurance company?"

The government is issuing what could be a huge loan, but it is also charging AIG about an 11 percent interest rate.

"It's almost usurious, isn't it? St. Thomas Aquinas probably wouldn't approve of that," says Bob McTeer, who ran the Federal Reserve Bank of Dallas for 14 years.

He says the government is pretty careful when it executes these loans. In the 1990s, he says, the U.S. essentially bailed out Mexico when it was having an exchange-rate crisis.

"A lot of people were very worried that we'd lose money," McTeer says. "And we actually made money. And the loan was paid off early, and so on and so forth."

So the question is: Will AIG be able to pay back the loan with the interest?

Probably so, says Mohamed El-Erian, the co-CEO of PIMCO, an investment company that specializes in bonds and debt. He says it's likely because AIG is a huge company. There are some parts that are in real trouble — essentially selling insurance on mortgages, for instance — but there are other parts that are making money, he says.

"I think it's a little bit like a fire that hit a very big neighborhood," El-Erian says. "Some houses are damaged. Others are not. And you are asked, as a buyer, 'Are you willing to buy the whole neighborhood?' "

El-Erian says the government's bet on the "whole neighborhood" is a good one. It's only a problem if everyone takes his insurance business elsewhere. And he doesn't think that will happen.

Another factor to consider is that AIG does more than insurance: It leases airplanes.

"They own something like 1,000 planes," says Ron Shelp, a former AIG executive who wrote a history of the company called Fallen Giant.

He says if AIG sells off the airline part of the company, that alone would go a long way toward repaying the loan. But it's a little unclear how much the airplane operations are worth.

"I have read and heard $50 billion," Shelp says. "But then [was] told they wouldn't get it. A man I talked to yesterday insisted to me it wasn't more than $15 [billion] or $20 billion. So I don't know. I think it's on the higher end."

The U.S. government will also own a huge amount of stock in AIG. It closed at $2.05 Wednesday, so it has almost nowhere to go but up.

But if this is such an easy way to make money, why doesn't the government do it more often? McTeer says that would be socialism.

And, in any case, the potential profits are small, at least compared with the federal budget.

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