AIG May Not Be as Healthy as It Looks

By Roben Farzad

American International Group (AIG) has come a long way since its record $182 billion government bailout in the financial crisis. It has been buying back its stock from the Department of the Treasury, helping to reduce Washington’s stake in the company to 70 percent from a peak of 92 percent. It posted a profit of $21.5 billion for the fourth quarter of last year, a showing that helped push the stock price up 40 percent this year through April 24, to $32.40 a share. Analysts for Wells Fargo (WFC) and Bernstein Research (AB) are recommending the shares to investors as the company nears what they believe will be a complete exit from government ownership within a year.

Still, AIG may not be as healthy as it seems. Critics including Neil Barofsky and Elizabeth Warren, who helped oversee the government’s Troubled Asset Relief Program, contend AIG is benefiting from favorable treatment from Washington that amounts to a “stealth bailout,” in Warren’s words. And some analysts, including Morningstar’s (MORN) Jim Ryan, say the insurer’s underlying businesses are struggling.

One point of contention is Treasury’s decision to allow AIG—along with TARP recipients Citigroup (C) and Ally Financial—to use operating losses from previous years to eliminate taxes on current income. The allowance, which typically does not apply to bankrupt or acquired companies, added $17.7 billion to AIG’s fourth-quarter earnings and will allow the company to shield profits from taxes for many years to come. “It’s important to remember that a substantial portion of AIG’s recent earnings were attributable to Treasury’s unilateral decision to preserve AIG’s net operating losses,” says J. Mark McWatters, a law professor at Southern Methodist University who was a Republican appointee to the TARP oversight committee....