AIG’s dark days: A man leaves the insurance giant’s offices in New York Monday, when the firm reported $61.7 billion in losses for the end of 2008. The US is pledging more assistance to shore up the firm.
(Mark Lennihan/AP)Photos (1 of 1)
Why US keeps backstopping a flattened AIG
It pledges $30 billion more, amid insurance giant’s record losses.
By Ron Scherer | Staff writer/ March 2, 2009 edition
Reporter Ron Scherer notes that insurance giant AIG should have heeded its own television ads about risk management.
Reporter Ron Scherer
New York
After Lehman Brothers failed in September, the financial markets froze up, causing interest rates to jump despite vigorous efforts by central bankers worldwide to keep credit flowing. Would the same thing happen – or perhaps something worse – if the US let troubled insurance giant AIG (American International Group) fail?
Yes, is the reply from the US Treasury and the Federal Reserve, which added another $30 billion commitment to AIG on Monday. This increases taxpayers’ pledges to the company to $180 billion – about the same amount to be spent this year under the just-passed economic stimulus package. It is the fourth time Uncle Sam has had to backstop the company.
“AIG by itself is not important, but it is intertwined in so many other aspects of our financial life and so many people rely on it in one form or another,” says Stan Collender, a partner at Qorvis Communications in Washington. “If AIG were allowed to go down, it could lead to possibly a global depression.”
AIG provides insurance to 100,000 entities, including small businesses, municipalities, 401(k) plans, and Fortune 500 companies, which employ more than 100 million Americans, notes a joint statement Monday from the US Treasury and the Federal Reserve about the complex financial transactions involving the company. In addition, AIG has 30 million policyholders and provides retirement insurance for hundreds of thousands of teachers and nonprofit organizations.
Unsettling to markets
The additional US financial commitment comes the same day that AIG reported a loss in the fourth quarter of $61.7 billion, the largest corporate loss ever in one quarter. Though the dismal news had been telegraphed late last week, investors drove up the value of the US dollar as they scrambled to buy US Treasury bills.
On Monday morning, the stock market reacted badly to the AIG loss and the turmoil in the financial markets. The Dow Jones Industrial Average quickly dropped below 7000.
“Seven thousand is a psychological level,” says Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla. “It’s all like a bad dream.”
The markets are unsettled in part because the government appears to be stumbling from one financial crisis to another, says Mr. Brown. “We need some kind of financial stability for a long-lasting recovery.”
For its part, AIG characterized the latest government effort as a restructuring that will strengthen its capital base and reduce the amount of money it owes taxpayers. The latest commitment by the US will allow AIG over a five-year period to raise $30 billion of capital by issuing noncumulative preferred stock to the US Treasury when the company needs the money.
At the same time, AIG said the government’s preferred-stock holdings will be modified so that they “more closely resemble common equity.” This is similar to what the US is doing with Citigroup.
“No one wants to inject capital in these companies if they see the government ahead of them” in terms of getting money back in the event of a bankruptcy, says Doug Roberts, chief investment strategist at Channel Capital Research.com in Shrewsbury, N.J. “Why take the risk?”
The move does increase the risk to taxpayers, however. “They no longer have a preferred position,” notes Mr. Roberts.
Despite its financial problems, AIG, in a statement issued Monday says its underlying businesses “remain strong, well-capitalized, and competitive.”
Since last September, the company has made progress in reducing “the excessive risk” from exposure to “certain financial products,” it says.
Peril of derivatives
AIG got into trouble after its London office sold enormous quantities of derivative-type financial products. These are complex financial instruments that are supposed to act like mortgages, commodities, or other financial products. According to news reports, AIG’s main clients were European banks.
When the US government made its first investment in AIG – some $85 billion – last September, the company planned to repay the taxpayers by selling some of its assets. However, now the company says the sharp decline in global economic conditions has adversely affected its ability to divest those assets.
“The very same global forces that we face have greatly diminished the ability of qualified buyers to raise the capital necessary to buy AIG’s businesses right now,” said Paula Rosput Reynolds, AIG’s vice chairman and head of restructuring.
That’s one reason AIG now will give the US equity stakes in two subsidiaries – Asia-based American International Assurance Co. and American Life Insurance Co. – in return for a reduction in $26 billion in debt it owes the government. The company also expects to transfer to the Federal Reserve Bank of New York securitization notes that are part of its insurance operations of up to $8.5 billion, a move that will also reduce the amount it owes the US.
The company’s executives say its insurance operations are fine.
“They’re secure, they are protected,” said Edward Liddy, the company’s CEO, in an interview Monday morning on the “Today” show. “It’s all the other ancillary businesses that are causing this. And it’s the decline in asset values around the globe.”
A disavowal of ‘public ownership’
In its joint statement, the US Treasury and the Fed said, “Public ownership of financial institutions is not a policy goal and, to the extent public ownership is an outcome of Treasury actions, as it has been with AIG, it will work to replace government resources with those from the private sector to create a more focused, restructured and viable economic entity as rapidly as possible.”
Roberts, the investment strategist at Channel Capital, is doubtful. Even with the latest AIG restructuring moves, the US government will still own about 80 percent of the ailing company.
“What it comes down to is you are effectively nationalizing the company,” Roberts says. “Then, why will anyone invest additional capital in AIG? So, the government is dancing around, saying there is still some value left for common shareholders.”
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Comments
2. Glenn | 03.02.09
Obama administration, perhaps you can ask for a “start over” as this game is not playing out remotely in your favor. Please come up with a plan … not just yet, though. I am still buying up stocks at fire sale prices created as your every move drives the market down.
4. Ian Mackenzie | 03.02.09
It is looking more and more like bailing out AIG was a mistake in the first place and now we are throwing good money after bad. No company should be considered “too big to fail”. That is why we have bankruptcy laws. I have a hard time believing I’ll ever get anything for my families $1400.
5. Kuriakose Pilkeel | 03.02.09
There is no end to irresponsibility. Yet the poor you and me keep on paying to those who mismanaged; they still fly in private jets unjoy all lexuries and we end up jobless and homeless.
One thing that the nation should do is to issue code of ethics and establish professional licensing process for senior executives whose job functions may affect the lives of citizens and/or the economic health of the country (and the world itself!);Regardless of whther they work for Govt or Private. What is the use of catching someone after the damage is done. The performane review of such executives, their outlook on public matters, their competancy to perform the responsibilities of the job, their integrity and honesty all should be on continuous review
6. Zenbob96 | 03.02.09
Why would the US Government (read Taxpayer) wish to nationalize and indemnify AIG, when it is the equivalent of purchasing worthless paper? They have lost more money than most 3rd world nations produce as GNP. When will financial professionals learn when to cut the cord, rather than following bad money after good? If such an injection was going to allow the company to return to good health, that would already have happened after the first mammoth “loan.”
Now it isn’t a loan, its an equity position with full liability! At some point, rather than pouring money into the burned out ruined shell of a house, it becomes time to build a new house from scratch with new and better management and oversight.
My small business would do very well with just a $35 million loan. Across the country, SBA loans of between $5 and 40 million dolars could turn most of the economy around, and the aggregate cost would be less than bailing out AIG, and others in the same sinking boat. Wake up USA, those old ships have not only sailed, they have hit ice bergs and are sinking fast.
Its time to launch a new fleet!
Zenbob
7. Zenbob96 | 03.02.09
Why would the US Government (read Taxpayer) wish to nationalize and indemnify AIG, when it is the equivalent of purchasing worthless paper? They have lost more money than most 3rd world nations produce as GNP. When will financial professionals learn when to cut the cord, rather than following bad money after good? If such an injection was going to allow the company to return to good health, that would already have happened after the first mammoth “loan.”
Now it isn’t a loan, its an equity position with full liability! At some point, rather than pouring money into the burned out ruined shell of a house, it becomes time to build a new house from scratch with new and better management and oversight.
My small business would do very well with just a $35 million loan. Across the country, SBA loans of between $5 and 40 million dollars could turn most of the economy around, and the aggregate cost would be less than bailing out AIG, and others in the same sinking boat. Wake up USA, those old ships have not only sailed, they have hit ice bergs and are sinking fast.
Its time to launch a new fleet!
Zenbob
8. Leric Goodman | 03.02.09
The current approach of bailout after bailout to stabilize the economy is trying to push cooked spaghetti. It doesn’t work very well.
AIG is in trouble because of credit default swaps (insurance) on mortgage-backed securities. Mortgage-backed securities are in trouble because of an ever-growing tsunami of foreclosures. So STOP FORECLOSING. Do a DeBeers — take all the foreclosures off the market and sell them a bit at a time at a rate that whatever is left of a market can absorb them.
That will (1) allow the market to firm up, (2) firming up the valuations of mortgage-backed securities, and (3) ease pressure on AIG and others on the credit default swaps, without having to put $60 billion into AIG every so often to keep the whole system going.
Pull the our limp noodle economy along instead of trying to push it forward.
9. Mike | 03.02.09
Why wont anyone be honest and say why AIG keeps getting saved. The congress peoples trust funds and retirement is through AIG. Wish this would make it to the news.
10. Mike Parks | 03.02.09
Memo to Depts of Treasury/Justice: Does AIG meet the definition of a “monopoly”? How could this country have allowed any single entity to become “too big to fail”? For all Republican free market, anti-regulation capitalists everywhere, let this be a lesson just as the Standard Oil Trust was a lesson to the administration of Teddy Roosevelt. Monopolies, like dictators, can be efficient but their power in a “free market” vacuum is disasterous to democracy and the social compact of a civil society. The United States needs to immediately “bust up” AIG, dissolve all shareholder equity (thanks to “Ace” Greenberg and other financial “wizards”), and sell off profitable assets with taxpayers being first in line.
11. Helmuth | 03.02.09
… employs 100 million …
So this leaves the country with 2.5 kids or the .5 are the workers who are not a part of the fortune 500 circle?
I hear all this gloom and doom. To big to fail. It seems the government has sunk so much money into this outfit that the government whould just step in and take it over, and scrutinize the books to see where all the money is and going. Maybe for some clients, pay them a few cents on the dollar. The typical modification would be reducing their wages, eliminating bonuses unless they can prove they made the company money, and even then, limit it to no more then $100,000 per year in bonuses.
I want to see the operation(financial) books opened up for review.
12. Cliff | 03.02.09
Based upon agonizing first hand experience it is my opinion that AIG is failing because it is a lousy insurance company, overburdened by elaborate internal procedures that leave the insured in the dark uninformed and hounded by collectors for bills AIG not only hasn’t paid but also denies being aware of. No matter the influx of “our” money they will surely fail. AIG has demonstrated that it is a ponderous top heavy loser that cash alone will not salvage.
Cliff
13. Mel Moore | 03.02.09
Amidst the shameful exhibition of investment strategy gone wrong, has anyone stopped to investigate whether Bin Laden is involved with AIG?
This seems to be domestic terrorism, impacting the world.
14. Tellucas@aol.com | 03.02.09
The US Gov needs to take immediate definitive action with AIG either take it over (ie AIG Federal Holdings) ,or break it up and assign its business to others to absorb into their own operations along with some Gov cash to aid digestion if needed. The US Gov should also evaluate the nature of AIG’s loses is it relates to other large entities and intensify AIG’s loss throttling measures.
15. zelbert truth | 03.02.09
The government pumps in money to pump up remaining stocks which are then sold i.e. the governement in collusion with corporate cronies are siphoning off money leaving taxpayers holding worthless stocks. Nationalize now and be done with it! shareholder’s loss is their own fault/risk!
16. Jeff Bach | 03.02.09
Wow. DOW at 6700, crisis after crisis. Very hard to stay calm and not greatly desire a few heads to start rolling. Someone in that AIG London office needs to spend some time in a small secure room for five to ten and think about the impact they have had on pretty much all of us.
17. Dave in NC | 03.02.09
Maybe the backing has something to do with AIG handling Congress’s pension funds. Maybe this is a backdoor way of propping the pensions up.
And maybe I just look for the worst in anything political because that is usually closest to the truth.
18. Richard Cummings | 03.02.09
There is a choice: The government can pump money into AIG and watch it fail or it cannot pump money into it and watch it fail. The choice would appear to be obvious, but let it never be said that that an obvious choice would be made the government.
19. Jason | 03.02.09
I’m interested to know why the taxpayers are the first financial pool the government keeps going to seeking capital investments/injections for these troubled companies. As a staunch democrat I respect the governments intervention. However, why isn’t the Executive management tapped for capital investment? Why isn’t the management of the company, who, for so long enjoyed incredible bonuses, tapped to investment?
Are we afraid or publicizing the fact that the Executive Management isn’t likely to put their own money up for the betterment of the company?
20. d bronson | 03.02.09
take a look at the poor assets aig is offering for sale, it’s not suprising that no one will purchase them. also take a look at the a+ insurance companies they own. the go’vt should make them sell one or two of these as repayment.
21. Annelies | 03.02.09
You know what I’d LOVE to see? A network graphic of AIG’s derivatives: where they came from, and where they went.
22. Sheldon | 03.02.09
With the global economic crisis getting worse, where is the U.S. government geeting the funding to bailout AIG with $180 billion? What ever happened to moral hazard, and why is taxpayers money being spent on AIG without any represntation or congressional review?
23. Robert | 03.02.09
I’m not entirely sure where Obama is getting his information, but what information he is getting is just plain wrong.
Founded 1919 in Shanghai, China, AIG is a foreign owned insurance corporation. Yes you read that right: the company is a CHINESE corporation. The ‘American’ in its name is anything but, and likely uses the name to elicit business as a play on patriotism.
At any rate the company isn’t even among the top ten carriers anymore and hasn’t been for years, with assets valued at less than $100B according to recent regulatory filings. The data is publicly available.
As for being ‘too interconnected to fail’, its far more likely the company is instead interconnected to some key players pocketbooks.
I’m not entirely sure why Obama insists on saving this sinking ship, a company that wasn’t even founded on U.S. soil to begin with. Heck if he’s just gonna just give away our money to the Chinese, why not just load up all the cash we have left onto a barge and send it over that way. At least that would be quicker.
24. C3 | 03.02.09
This is just another example of why we do not allow 100% privatization of social security, people’s retirement plans, or medicare / medicaid. If you add up the ponzi schemes and the uniquely bourgeoisie system of private corporations, you see that the Bernie Madoff’s and AIG’s of the world do not want you to succeed.
Do not take your eye off of the ball, Republican privatization does not work and the examples are furious. President Obama is having a difficult first 6 weeks, but this is long from over. Putting the power back in the hands of the people, for the moment, means rebuilding what actually works in the USA… Government for the People and by the People, even if AIG has to be policed back to health.
25. R. meagher | 03.02.09
If there is one lesson to be learned from this financial mess it is
we can no longer allow businesses to become too large to fail.
Imagine $180 billion for just one company. So Far. Our tax dollars!
This is not capitalism.
In the future we should split these monsters up before this happens again.
More than 100 years ago we did it to Standard oil and others.
Hopefully the President and Congress can have the courage to carve these titans up. Let’s hope their powerful lobbyists do not have more sway over our branches of government than we do.
26. Joe | 03.02.09
This is getting crazy!!!! I dont know what to think anymore. I know doing nothing would be a lot worse, but there has to be a better way of straightening this mess out. What that is? I have no clue I am not an economist.
27. Blaine Sorenson | 03.02.09
Despite its financial problems, AIG, in a statement issued Monday says its underlying businesses “remain strong, well-capitalized, and competitive.” I have a great deal of difficulty buying this. AIG’s business is to asses and manage risk. News Flash!!! AIG did a terrible job of of assessing and managing risk.
When do we break up these Co’s that are too big to fail? Are we doomed to continue to privatize profits and socialize losses because the consequences of a private Co.’s failure will cause massive harm to society?
28. Charles D. Arnold | 03.02.09
I am not clear about what part of your company caused or was the culprit for the losses. I need a better explanation and reason for such tremendous losses. Charles ARNOLD
29. Erik | 03.02.09
“After Lehman Brothers failed in September, the financial markets froze up, causing interest rates to jump despite vigorous efforts by central bankers worldwide to keep credit flowing.”
The credit crunch is an effect, but to suggest the Lehman Brother collapse was the cause is ridiculous.
30. Walter | 03.03.09
The taxpayer is not being protected. AIG payments will result in a windfall for it recipients, probalby foreign banks that made smart bets. These type of bets were illegal for almost a hundred years till the 1999 Commodities Modernization act allowed Credit Default Swaps.
Seems to me there is a possible moral solution to be explored. Consider and equitable method of voiding Credit Default Swaps as a matter of public policy. After all the capital requirements rules for this type of “insurance” were not followed. No one should profit from this disaster.
Otherwise much more money will be required.
31. James Stepp | 03.03.09
Unfortunately the government is correct in bailing out AIG, simply because we have no choice. That doesn’t mean we have to like it. It just means that we got handed a chocolate covered turd spouting salmanella, smallpox, herpes and anthrax. If we don’t take care of it our car will crash, with who knows what consequnces. I do know the consequences would be extreme.
If we hadn’t deregulated all the laws designed to protect the system then we wouldn’t have been in this mess in the first place. A company too big to fail without taking out our economy couldn’t have happened under those consumer protection laws. Now the government cannot even get these business’s to present accurate financial spreadsheets!
If it is too big to fail, it is too big to exist. I truly hope they feds are getting that message through all the noise, shock and awe laid down by the lobbyists who got us in this mess and will fight tooth and nail whatever we have to do to keep it from happening again.
Yeah right, holding my breath on that one.
32. Harold Reimann | 03.03.09
I said years ago that I would outlive the insurance companies. The $64,000 question is, “Will you?”
33. Jerry | 03.03.09
What do we have to do to STOP THESE USELESS BAILOUTS:)??????!!!!! I’ve contacted my representatives in Wisconsin and one is willing not to vote for any….What else???? Should we all start sending letters to Pres OBAMA…will he listen:)???….
34. Dan H | 03.03.09
So! A Chinese Company AIG, Manages our Politicians Retirement accounts, and we get to hold the bag. I guess you cannot get any more politically connected than being a Senator. Don’t give up that seat Mr Burris! It may be the last one in the lifeboat.
Us Steerage folks are going down with the ship AFTER we have emptied our wallets, IRAs, 401Ks etc into the bail-out bucket. I have no worries about privatizing SS, I am more concerned about our investments(or what is left of them)being confiscated for the “common good”. I moved all of my investments into hard assets last year. This is not Capitalism, it is Fraud!
35. Michael | 03.04.09
Where are the massive AIG layoffs? This company is bleeding US tax dollars, and nobody (CEO, CFO, etc) is losing their job? Any other company losing that much money would be cutting costs… reducing overhead… Where’s the beef??
36. Barton | 03.05.09
Cut the rope.
AIG is deeply troubled because of its connection to AIGFP–the London division that sold HIGHLY leveraged credit derivatives. AIG installed this division in London because London could write as many of these derivatives as they could sell, even if it could bankrupt the company–there was no reserve capital requirement.
AIG’s derivatives were bets that US mortgages would fail. The gamblers [usually hedge funds] were allowed to replicate their bets. And, it was LUCRATIVE. Revenue from derivatives in 1999 was 737 million, but by 2005 it was 3.26 billion and rising. The names of the gamblers are secret. While the foreclosures were a big hit on the global economy, it was not enough to bring down all of Western civilization. That took the credit derivatives.
This is what is bleeding AIG white. The ugly derivatives market.
The Bank for International Settlements estimated that the value of these commitments world-wide in 2007 was $596 trillion. Some are due now and will continue to come due –they usually have contracts of five years or less.
These instruments of destruction should be made illegal again (they were until the Commodities Future Modernization Act). They should be VOIDED as against public policy.
38. Virginia H. Cross | 03.15.09
Well most of my IRA’s are in AIG. I’ve worked with them to try to better my position. I found in my ‘folder’, a ‘cash management. I prayed and this was the result I took. When the penelty time is up on my investmenst, then I will be able to make better decisions with them. In the meantime, my money is safe for now. I would advise others to pray about their situations and cooperate with Aig for their best interest to solve their own problems with in if possible and quit finger pointing for faults. I’m a swimmer and I find swimming along with and across the currents is the best way to make land and stop fighting currents that are too strong to beat. Aig is working with you if you let them. Prayer helps a lot in situations that will best fit all mankind needs. When your going through hell, keep going. There’s light on the other end.Listen for new ideas and follow through.In the meantime keep swimming.
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1. Jerry Soriano | 03.02.09
So, shouldn’t the public eventually be able to make purchases or buy stocK?