Up until recently, the massive $180 billion bailout of AIG was considered a sunk cost. Few predicted the floundering insurance giant would repay the government, much less generate a profit for Uncle Sam. But now, AIG and the government have reached a deal that could "return a profit to taxpayers." Is that really possible? Here are the details of the plan followed by analysis from financial writers:

  • How Will AIG Pay Everything Back?  Melly Alazraki at Daily Finance explains the details:
Once the New York Fed has been paid in full, the U.S. Treasury will exchange the $49.1 billion in AIG preferred shares it holds due to the TARP bailout for approximately 1.655 billion shares of AIG common stock. In addition, AIG will issue up to 75 million warrants with a strike price of $45 per share to existing common shareholders. After the exchange, the Treasury will own 92.1% of the common stock of AIG, but will then sell its stake on the open market over time.

First, though, AIG expects to repay the entire $20 billion it borrowed from the New York Fed under the senior secured credit facility. It plans to do so with its own resources, as well as with funds raised through the sale of assets, including the initial public offering of its Asian life insurance business, American International Assurance Company, and the pending sale of its foreign life insurance company, American Life Insurance Company, to MetLife (MET)
  • This Exit Deal Is Worth a Try, writes Felix Salmon at Reuters: "I’m not convinced that the US will ultimately get paid back all the money it lent to AIG — and it certainly won’t be paid back with a level of interest commensurate with the amount of risk involved in the deal. It’s one thing to look at the value of the small number of AIG shares in free circulation; it’s something else entirely to assume that the government will be able to sell tens of billions of dollars’ worth of its own shares at anything like the same level. But it’s certainly worth a try. So long as the stock market continues to place a significant positive value on the company, it would be foolish of the government not to."
  • Wrong—Taxpayers Are Not Getting Compensated, insists Yves Smith at Naked Capitalism: "Let’s not kid ourselves: all this fancy financial footwork is to divert public attention from the fact that AIG will deliver big losses to the taxpayer. The latest Congressional Oversight Panel report contained estimates of losses on the AIG financing, with estimates from separate government sources ranging form $36 to $50 billion. Do you see this acknowledged ANYWHERE in the New York Times, Bloomberg, or Wall Street Journal? (To its credit, the FT does pick this up). No, which means this propagandizing, sadly, is proving to be quite effective."
  • This Could Work, contends Dan Indiviglio at The Atlantic: "It's conceivable that the Treasury could get its money back -- or even make a profit. It would depend a lot on AIG's performance between now and when the government begins to sell its stake. If the Treasury sells those shares for more than $29.67 per share (which is plausible as the stock is currently trading around $38), and if AIG is able to pay back the full $22 billion in preferred shares, then the Treasury will be made whole."
  • No Reason to Celebrate Regardless, writes The Economist: "One insider suggested to the Wall Street Journal that the government could turn a profit if its shares can be sold for more than $30 each. That looks doable (assuming the calculation is correct). It does not, however, take account of the huge amounts of indirect support that AIG—and the rest of the financial system—has received since 2008. From the public’s perspective, the outcome will likely be much better than originally feared. But hardly cause for celebration."