We taxpayers agreed to pony up $182.5 billion to bail out AIG after the credit derivative debacle (well, mostly we taxpayers). There were two criticisms of the deal; first that the government should allow the market to determine winners and losers, and second that we’d lose our money. First, the second criticism.
As of yesterday, the Federal Reserve got all its money back plus more. AIG (now doing business as Chartis) announced it has repaid all the Fed money it borrowed (it did not need $21 of the $182.5 billion) and dramatically reduced the amount it owes the US Treasury.
To date, AIG has paid back about $152 billion.
While most of these dollars came from the sale of assets – insurance companies, leasing companies, and other subsidiaries of AIG, this would not have happened if not for significant improvements in the company’s ongoing operations.
That is a credit to the Chartis employees who suffered – and I do mean suffered – through the brutal conditions after AIG’s credit derivative investment group damn near killed the whole company, and a good chunk of the world economy along with it. Whether it was navigating the crowds of protestors outside company buildings, avoiding neighbors at cocktail parties and cookouts, testifying before regulators and Congress, or talking to customers, brokers and prospects, the late summer and fall of 2008 were just awful.
Chartis still has significant issues (excess work comp book is a big one), but CEO Benmosche has the company back on the right track. And thanks to those who stayed and fixed Chartis, the Fed has actually made a profit on that bailout – a profit of at least $3 billion and probably twice that.
In regard to the first complaint about the bailout, there’s a legitimate argument to be made that governments should not bail out companies that fail. In the case of AIG, I believe that’s not the case, for two reasons.
First, inadequate regulations undoubtedly played a part in the credit derivative issue. Thus, government was somewhat responsible for the disaster, and we – the people – are the government. We “allowed” AIG to made those now-obviously-incredibly-stupid investments (isn’t hindsight great?), so, because the problems inherent in a failure of AIG were so monumental, we have to share the responsibility for fixing the problem.
Second, AIG had its fingers in so many aspects of global finance that a failure would have been more than a disaster – it would have cratered the world economy and devastated many individuals, companies, and families. As I noted back in 2009, “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.”
Thanks to WorkCompCentral for the head’s up.
Jun
15
I don’t know if they changed it or not, But years ago American Insurance carriers were limited in the Amount they could invest in the stockmarket to 7% of Assets, Canadiens could go higher so they had better investment returns. I guess my question is how could this type of risk fall thru the cracks?
Joe:
First, I know it’s popular, but it’s not the government’s job to protect us from ourselves. In this case, we speaking of a corporation and it’s not the govenement’s job to stop them from making stupid decisions; it’s the marketplace’s. The government’s job is to set the rules and the market participants are responsible for playing by them. If they break the rules, the government enforces the rules with penalties. We DID NOT “allow” AIG to make those decisions. AIG and and it’s enablers, those that continued to invest without performing due diligence, are responsible for the decisions it made (which turned out to be horrible).
As for letting them fail, they should have been allowed to fail and the company liquidated. The government’s only job should have been to step in, should it have truly been necessary, and use its tools to reduce systemic risk. In no way should the government allowed AIG to survive its poor business decisions. The good people left at AIG would have been free to employed by another market participant, capable of making sound business decisions and we would all have been better for it.
Allen – thanks for the comment.
Re AIG, the government isn’t protecting us from ourselves, it is protecting the nation from the devastation that would have occurred if AIG had declared bankruptcy. The impact woud have affected individuals, companies, industries, and regions – from teachers who would have lost their pensions, to the airlines that would have no planes to fly, the shipping companies with no coverage for their cargoes, the large employers with no excess workers comp insurance all would have had devastating effects on the US and global economies.
When we – the government – allow a company to get to the point where its failure can destroy a major part of our economy, then we are at fault. We absolutely allowed AIG to make those decisions by failing to recognize and address the risk inherent in credit default swaps and their cousins.
The government did “step in and use its tools to reduce systemic risk” by forcing AIG to liquidate most of its assets – that’s why they sold off their life business in Asia, airplane leasing business, and countless other assets. The funds from those sales have been used to pay us – the taxpayer – back.
While I understand the desire to think of this simplistically, truth is AIG was “too big to fail.”