Washington Bends Logic Into Mobius Strip To Show Profit On AIG Bailout

The U.S. government has gone into a full-throated propaganda offensive to show that the highly controversial 2008 bailouts of insurance giant American International Group, Inc. (NYSE: AIG) were profitable.

In a statement posted within an official U.S. Treasury blog, the government published the accompanying infographic, which purports to show Uncle Sam has "realized a combined $15.1 billion positive return" on the $182 billion it set aside nearly four years ago to save the New York-based company.

But pundits immediately seized on the fact the government was using magical accounting to show a profit, combining the money losing part of the bailout undertaken by the U.S. Treasury with the profitable investment in AIG done by the Federal Reserve Bank of New York. Neil Barofsky, the outspoken former Inspector General of the TARP bailout fund, was cited by the New York Times Tuesday noting the government had "mixed the pot" in its accounting and was "really engaged in half-truths and creative accounting" with "timing keyed to the election."

The government's framing of the AIG rescue as "a very substantial positive gain for the American taxpayer," in the words of Treasury Secretary Tim Geithner Tuesday, came on the heels of an announcement that the Treasury was placing a substantial portion of the equity stake it acquired during the bailouts back in the market. The offering price of $32.50 per share is more than the $28.73 the government says represents a "break-even price," but less than the $43.53 per share Barofsky has cited in the past as a true per-share cost of the government rescue. Following Barofsky's line of thinking, the highly respected investigative journalism project ProPublica estimates the government is still $2.6 billion shy of claiming a gain.

The government, which will still hold some 234.2 million shares of common stock in AIG after the sale, or 15.9 percent of the company, has dismissed Barofsky's comments in the past, with the White House glibly suggesting "some people just don't like movies with happy endings."

But others, particularly in the high-end financial blogosphere, were also pointing out Tuesday that Treasury's disingenious math is not taking into consideration the opportunity costs eaten up by the bailouts.

Liberal-leaning financial news blog Naked Capitalism has also noted that government accounting does not include a significant part of the bailout to AIG that has been swept somewhat under the public rug, $25 billion in tax benefit that the government has allowed AIG to take by re-writing IRS rules to the company's favor since 2009. And over at DealBreaker, Matt Levine wrote he "got increasingly frustrated, then angry, then drunk" trying to reconcile Treasury's numbers to reality. A fair way to determine if the bailouts produced an "economic profit," Levine notes, would be to assume the Federal Reserve's contribution to the pot should have returned 12 percent in an annualized basis, the interest the central bank was charging in discount window withdrawals at the time of the financial rescue.

Surprisingly, even if they disagree on the numbers, bailout boosters and critics both concede that the extraordinary actions were inevitable.

Mirroring Treasury's claim that the rescue of AIG was "a critical part of a broad-based effort to break the back of an historic financial panic and prevent a second Great Depression," Baroksky told the Times that "the government had no choice but to bail out AIG."

But guess who said Tuesday that "committing $182 billion to stabilize AIG was something that the government should never have had to do"? Pat yourself on the back if you said Tim Geithner.