Experts: Taxpayers unlikely to be fully repaid in AIG bailout

Pressure is mounting on the government to revise its bailout of AIG to ensure that taxpayers are repaid as much as possible of the more than $170 billion lent to the insurer.

Experts warn we shouldn't expect to get much back.

The problem stems from AIG's obligations to its trading partners. So far, the hobbled insurance giant has honored in full its contracts with U.S. and foreign banks. It's paid out more than $90 billion in taxpayer money to keep some of the biggest names in finance from losing money on bad bets linked to subprime mortgages and other risky assets.

'A contract is a contract'

As the cost of the rescue swells, experts says it's becoming harder to envision a scenario in which the government could recoup its full investment. Even though the AIG payouts to major banks have angered critics of the bailout, it might be legally impossible to claw back any of the billions already doled out.

"A contract is a contract," said Russell Walker, a risk management professor at Northwestern University. "That money all went to people who bought protection from AIG."

The government agreed to uphold those contracts when it seized control of American International Group in September. It argued that failing to repay the debts of the globally interconnected company could cause catastrophic losses at big international banks, potentially toppling the financial system.

Obama's stance toward the AIG bonuses raises the question of whether the government could also pursue the billions paid to AIG's trading partners. Under growing scrutiny from Congress, AIG on Sunday finally identified those trading partners that indirectly benefited the most from its bailout.

Among the largest recipients, Goldman Sachs received $12.9 billion; Merrill Lynch got $6.8 billion. AIG also funneled billions into foreign banks, including $11.8 billion to Germany's Deutsche Bank and $8.5 billion to Britain's Barclays PLC.

Asked whether he'd favor trying to see if those AIG contracts could be broken so the government could recover some of those payouts, Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, stopped short of endorsing the idea. But he said, "I would want to know the consequences of not paying those debts."

Partners knew the risk?

Other critics want the government to go further. They say AIG's trading partners should be forced to take less than 100 percent of the value of their derivatives contracts with AIG. They noted that the protection AIG offered -- in the form of complex products called credit-default swaps -- was unregulated and that AIG's trading partners knew the risks and should have to assume some losses.

No bailout recipient has burned through more taxpayer money than AIG, which is now about 80 percent owned by the government. A 90-year-old insurer, it was listed as recently as last year as the world's 18th-largest publicly traded company.

The government has made four attempts to save the company, including a $30 billion cash injection two weeks ago. The latest lifeline came as AIG reported a $62 billion fourth-quarter loss, the worst three-month performance in U.S. corporate history.

AIG's dire reality has raised doubts about the government's claim that it will recoup much of its investment. The government's plan to get its money back rests on breaking up and selling AIG's profitable units. But given the company's financial woes and the depressed value of financial assets right now, experts doubt those businesses could fetch a high enough price today to reimburse taxpayers for the bailout.