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Former bailout watchdogs criticize AIG tax break

March 12, 2012|By Jim Puzzanghera
  • The AIG logo on its New York headquarters.
The AIG logo on its New York headquarters. (AP Photo/Mark Lennihan )

Reporting from Washington — American International Group Inc.'s recent $20 billion quarterly profit was almost entirely because of an inappropriate tax break the government-owned insurance company continues to receive, according to four former members of the watchdog panel that oversaw the financial crisis bailouts.

The break allows AIG to count its past net operating losses against future taxes. That amounts to a "stealth bailout" of a company that received about $125 billion in taxpayer money, said the former appointees to the Congressional Oversight Panel for the $700 billion Troubled Asset Relief Program.

"It’s been more than three years since AIG lost its reckless bet on mortgage-backed securities, yet today AIG continues to get special tax breaks that last quarter accounted for 90% of its profits," the panel's former chairwoman, Elizabeth Warren, told reporters Monday on a conference call. "We think it's time for Congress to end the special tax break."

Warren, who is running as a Democrat for the U.S. Senate in Massachusetts, was joined by former panel members Damon Silvers, Mark McWatters and Kenneth Troske in saying the tax break gives the illusion of significant profitability at the company.

The profits benefit AIG's private stockholders and allow the company to pay higher executive compensation, the TARP panel members said.

"By doing it this way….billions of dollars leak out to the benefits of private parties, who really should not be benefiting from public policy in this way," Silvers said.

The oversight panel was shut down last April, as set forth in the bailout law, but the panel members said they had paid close attention to the AIG bailout. Last month, AIG reported a $19.8 billion profit for the final three months of 2011.

Of that profit, $17.7 billion came from the break on earlier operating losses stemming from AIG's near collapse in 2008 because of the complex insurance coverage it sold for mortgage-backed securities.

Companies that file for bankruptcy or are acquired by other firms normally are prevented from using their net operating losses to offset future bills. But during the bailouts of the financial crisis, the Treasury decided the rule would not apply to private companies acquired by the government. In addition to AIG, that also included General Motors Corp.

The panel members said no company should be getting that tax break, but focused on AIG because they said the tax break is such a major factor in its recent quarterly profit. AIG said that after tax operating income for the fourth quarter was only $1.6 billion.

The Treasury and the Federal Reserve have been working to reduce their stake in AIG. Last week, the Treasury said it was selling $6 billion in AIG stock and struck a deal with the company to repay an additional $8.5 billion of the government's investment.

The moves reduced to $47.1 billion the bill for AIG's complex bailout by bailout by the Treasury and Federal Reserve. The deals also reduced the government's ownership stake in the company to 70% from 77%.

Treasury officials have defended the tax break. In a blog post this month, Emily McMahon, acting assistant secretary for tax policy, said the prohibition on the use of net operating losses was designed to prevent companies from acquiring failing firms to reduce future tax bills.

That wasn't the government's goal in acquiring a majority stake in AIG and some other companies, which was done "to help stabilize the economy and to prevent a global financial collapse," she said.

"The government, of course, is not a taxpayer and has no interest in sheltering taxable income," McMahon said. "It would have been counter-productive — and perhaps irresponsible — to undermine the stability of those ...institutions, at the height of the financial crisis, by imposing a tax code provision that was never intended to apply in this context."

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