There have been many complaints about the $150 billion pumped into AIG by we taxpayers, from the Fed Chairman, Senators, individuals, and MCM readers.
AIG is not too big to fail; it is too ‘connected’ to be allowed to fail. AIG provides the underpinning for many pension funds and retirement plans; its financial instruments guarantee the returns for pensioners. It backs up the investment of many banks. It owns many of the airlines’ airplanes, planes that might be repossessed if AIG goes under. AIG insures many Fortune 500 companies, and is among the largest writers of workers comp in the nation. It is a large individual auto insurer as well.
An article in today’s LATimes lays out a few of the myriad ways AIG is involved in the economy and individuals’ lives. It also describes how we got here:
” Beyond the more or less predictable consequences of letting a company like AIG go down are the murkier possibilities known as “systemic risks” — most of them arising from AIG’s rush in recent decades into all sorts of highly speculative businesses that were a huge departure from the staid world of insurance.
Some experts say what these ventures have done is make an AIG or a Citigroup that’s “too interconnected to fail.” And it’s not just the size that would matter. AIG’s interconnectedness with other companies, markets and economies is so huge and convoluted that it’s almost impossible to foresee what all the consequences of collapse would be.
The prime example of this problem is about $500 billion in unregulated credit default swaps held by AIG. Those complex financial instruments are essentially insurance policies taken out on mortgage-backed securities and other assets. The swaps were designed to pay out money to buyers who got caught in exactly the type of financial crisis taking place right now.
In essence, AIG was committed to insuring hundreds of billions, if not trillions, of dollars in investments. When the housing market crashed and the economy nose-dived, those investments tanked as well. And AIG was liable for the losses — a liability so large that it is now overwhelming the rest of the company, including the still-profitable parts.
What’s worse, because credit default swaps were unregulated and the layers of transactions so arcane that they are difficult to understand clearly, the true cost is essentially impossible to measure with certainty. Once the dominoes began to fall, no one knew where the process would end.”
What the Feds have done with the latest re-configuration of the bail out is to buy time – months during which the company can sell off assets, write down losses, and separate out the still-viable businesses from the essentially-bankrupt. As I predicted a week ago, the domestic insurance business will in all likelihood be spun off, raising billions to begin the repayment process. The Asian businesses will be carefully packaged for sale, a step necessary when potential buyers backed out ten days ago. The auto and life business will also be separated, sanitized, and sold off.
The resulting funds will go a long ways to paying us back. Not all the way, but a long way.
That’s all good. What isn’t good is AIG’s desperate effort to add premium dollars, an effort that by several accounts is leading the company to abandon all pretense of underwriting. Sources from headquarters staff at large competitors to several brokers around the country indicate AIG is quoting rates for P&C coverage that have only a ephemeral relationship to the actual cost of risk. The sense is that AIG is doing anything it can to add premium, and thereby build up the companies’ financials.
So, down the road – say in a couple years, the shortsightedness of this approach will become obvious. Even more obvious than it is today. Claims will come in, reserves will be needed to fund those claims, and it is possible, if not likely, that there won’t be enough capital to fund future claims.
What does this mean for you?
A very tough market to sell into – for now. By mortgaging its future, AIG is guaranteeing it will survive for a while, and may well be assuring its eventual demise.
Mar
9
