Finding A Greater Fool

From Bloomberg:

Look through the footnotes in American International Group Inc. (AIG)’s latest annual report, and you will see a long section analyzing the company’s ability to use past losses to offset future income-tax obligations.

The gist: AIG’s executives have gazed into their crystal ball and concluded that the company’s prospects don’t look good. That dim outlook may help explain why the U.S. Treasury Department seems so anxious to begin reducing its 92 percent stake in the bailed-out insurance company, after a 36 percent drop in AIG’s stock price this year.

The disclosures to watch here have to do with an item known as deferred-tax assets. Typically these consist of tax- deductible losses and expenses carried forward from prior periods. Companies can use these to lower future tax bills.

Under generally accepted accounting principles, such carry- forwards are valuable only to companies that are profitable and paying income taxes. If a company doesn’t expect to fully use these assets, it’s required to record what’s called a valuation allowance on its balance sheet to reduce their carrying amount.

In AIG’s case, the company has set up a full valuation allowance against its deferred-tax assets. AIG said it did so based on management’s conclusion that the assets “more likely than not” won’t be used. Forward-looking indicators don’t get much more bearish than this.

Here are the numbers: AIG said it had net deferred-tax assets of $24.5 billion as of Dec. 31, before factoring in the allowance. With the allowance, which was $25.8 billion, AIG finished last year with a $1.3 billion net deferred-tax liability -- in effect, a future tax obligation.

Wipe Out

In other words, the allowance more than wiped out the net assets. This wasn’t the case a year earlier. At the end of 2009, AIG showed net deferred-tax assets of $5.9 billion, including the allowance. AIG hasn’t disclosed what its tax assets were as of March 31, and a company spokesman, Mark Herr, wouldn’t say.

The footnotes also show a breakdown of the different types of AIG’s carry-forwards on a tax-return basis. For example, as of Dec. 31, AIG said it had $11.3 billion of net operating loss carry-forwards that expire from 2028 to 2030. It would need about $32.3 billion of taxable income from its operations over 20 years to fully reap those benefits, assuming a 35 percent tax rate. AIG concluded it likely won’t realize any of them.

“The implication is there are significant questions about future profitability,” says Charles Mulford, an accounting professor at Georgia Institute of Technology in Atlanta, who reviewed AIG’s disclosures at my request. “It should give investors pause.”

Comments:

It appears that after spending untold billions of taxpayer dollars to bail out AIG, Treasury is looking to dump much of its share very soon.
Given AIG's poor prospectus, it appears that Treasury, by selling shares to the public is essentially getting bailed out from its own bailout. No doubt Treasury will spin this that they "made money" on this deal. The public that buys this stock, will for all intents and purposes have bailed out AIG twice. In the end, it appears this insurance giant is still a sinking ship.

This is the type of moral hazard with the public purse that FH Hayek tried to warn us about in his 1940s book The Road To Serfdom. Yet we allowed big government and big corporations to grow to their present size and influence.

Oh the corruption in high places!
How long will the American people put up with this?