‘If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG.”
— Ben Bernanke, Federal Reserve chairman
The government is stuck like the proverbial pig on a spit. Its hopes for a quick exit from AIG have disappeared. What happened?
The expected payout from American International Group asset sales shrunk because prospective buyers cannot get financing in the capital market and AIG’s businesses have deteriorated. The company said net premiums fell 22 percent in its U.S. commercial-insurance business in the fourth quarter of 2008.
Is this rescue effort “kosher” or just a pig in the poke? Because the Obama administration thinks there is too much pork, it wants to stop AIG’s proposals to pay tens of millions of dollars in executive bonuses. Federal Reserve Chairman Ben Bernanke is furious that AIG used its triple-A rating from the insurance part of its business to run what amounts to a huge casino whose losses overwhelmed the entire business.
Proponents of the AIG bailout argue that the company is “too big to fail.” The base case is that the company operates in approximately 133 countries, with the most extensive global network of any life insurer and international property-casualty company. In the United States, AIG has 375 million policies with a face value of $19 trillion. If AIG policyholders lose faith and cash in their policies, the entire insurance industry could falter.
The AIG rescue cost the government credibility; bailout costs ballooned to $160 billion. The government spent an additional $30 billion without increasing its previous 80 percent equity of AIG.
What is the likelihood of the taxpayers getting back their investment? Slim to none.
New York Insurance Superintendent Eric Dinallo concedes that selling AIG’s current assets likely wouldn’t yield enough to pay off its more than $150 billion in federal loans.
Why does AIG want to return to its insurance company roots and eliminate its toxic assets? Edward Liddy, current chief executive, provided this rationale: “AIG’s conglomerate structure is too complicated, unwieldy and opaque.”
AIG plans to form two companies; AIU Holdings and American Life Insurance Co. AIU Holdings will eventually become the “good” insurance company, providing domestic and foreign property and casualty insurance. The company will have more than 44,000 employees and customers in 130 companies. American Life Insurance will become the “bad” insurance company, holding all the toxic assets of AIG.
Gretchen Morgenson, a New York Times Pulitzer-winning writer, revealed some troubling issues regarding the AIG bailout in a Sept. 27 article,”Behind Biggest Insurer’s Crisis, a Blind Eye to a Web of Risk.” First of all, the government has acted inconsistently. That is, contemporaneously the government decided to save AIG while throwing Lehman Brothers under the proverbial bus.
Secondly, Treasury Secretary Henry Paulson had a conflict of interest when he abruptly changed his mind and recommended the AIG bailout. Specifically, Paulson had served as the CEO of Goldman Sachs. Taxpayers deserve clarification on whether Paulson has an ongoing financial interest tied to Goldman Sachs. Saving AIG helped Goldman because the firm was AIG’s largest trading partner, with some $20 billion of business tied to the insurer. Morgenson further claimed that the only Wall Street executive present during the AIG deliberations was Lloyd Blankfein, Goldman’s chief executive.
Is it possible that the financial problems of AIG rested almost entirely at the holding company rather than at the operating companies, and why is this distinction relevant? The operating companies — the insurance companies — are not only the bread and butter but possibly solvent.
In a March 2 editorial “The Never-Ending Bailout” The New York Times wrote: “The AIG bailouts fail the basic test of transparency: Who ends up with the money?”
Almost all of the bailout money has gone to AIG’s holding company, where the creditors are Wall Street institutions. These institutions might not be innocent victims of AIG’s demise. Moreover, they profited mightily from the relationship with AIG before it all came crashing down.
AIG’s insurance companies are operating companies that legally conduct business under strict state regulatory oversight and might not require bailout funds. State insurance examiners rather than Treasury or Federal Reserve officials possess the expertise and legal authority to determine solvency.
In the worst case scenario, if AIG did not have enough money, state governments maintain a reserve account to make certain that claims are paid.
As a scholar of the Great Depression, Bernanke knows full well that the New Deal succeeded because President Franklin Roosevelt restored confidence and credibility.
We need to believe that bailout efforts are not feeding an insatiable pig.
Originally published in the Sarasota Herald-Tribune
