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 Some analysts believe that it will take at least another $60 billion to stabilize America International Group Inc. (NYSE:AIG). In fact the insurer even said more money may be necessary after Monday's latest government deal. Yes, that means the government would be investing as much as a quarter of a trillion dollars into AIG. But the main question: After all of that money, can AIG CEO Edward Liddy and all the president's men put AIG back together again, or is this just another case of Humpty Dumpty?
Why does the government keep propping up the insurer? If AIG falls it could cause a domino effect not only across
the U.S. financial system, but the global financial system because AIG insured mortgage-backed securities -- including the the now troubled ones backed by risky subprime mortgages.
"Banks, financial firms and other AIG trading partners would have to write down the value of their securities -- a loss some fear could make those companies insolvent, as well," writes Politico's Lisa Lerer. Furthermore Reuters asserts that AIG's problems stem from former CEO Hank Greenberg, who in 1987 began the AIG Financial Products unit, which trades credit default swaps. But the risks also grew exponentially as the unit, driven by a thirst for greater profits, racked up guarantees on CDS worth a total of about $450 billion. ... Greenberg, in written testimony to a U.S. congressional hearing last October, argued that risk controls were not maintained at AIG Financial Products after he left, and that he would have done more to hedge the risks and head off losses." Apparently a significant counterparty was Goldman, Sachs & Co. (NYSE:GS),which was rumored to have received more than $20 billion, but that theory doesn't quite add up, according to The Wall Street Journal. One theory held that the $20 billion AIG owed to Goldman Sachs inspired the original rescue, but Goldman CEO Lloyd Blankfein recently told Congress that the firm had offsetting trades and therefore was not materially exposed. So which creditors needed a healthy AIG? AIG got into trouble after its London office sold enormous quantities of CDSs to its main clients, which are European banks. Joe Nocera's column in the Saturday New York Times explained how AIG's CDS business is intertwined with the banks and why the government feels the need to keep AIG together: How did banks get their risk measures low? It certainly wasn't by owning less risky assets. Instead, they simply bought A.I.G.'s credit-default swaps. The swaps meant that the risk of loss was transferred to A.I.G., and the collateral triggers made the bank portfolios look absolutely risk-free. Which meant minimal capital requirements, which the banks all wanted so they could increase their leverage and buy yet more "risk-free" assets. This practice became especially rampant in Europe. That lack of capital is one of the reasons the European banks have been in such trouble since the crisis began...Other firms used many of the same shady techniques as A.I.G., but none did them on such a broad scale and with such utter recklessness. And yet -- and this is the part that should make your blood boil -- the company is being kept alive precisely because it behaved so badly. Many investors, including Greenberg, believed the firm would have been better off in Chapter 11 bankruptcy. Greenberg is now suing the insurer to recoup $2 billion in personal wealth he lost when AIG was bailed out in September and spoke on CNBC about how the government's plan is a disaster. Felix Salmon of Portfolio asserts that Greenberg's actions are scandalous because the unregulated CDS business was a essentially a scam. AIG could have earned billions of dollars by selling insurance against a meltdown, even as it was wholly incapable of paying out on those policies. I wouldn't be surprised to learn that Hank Greenberg was still a billionaire, even as the policies his company wrote have cost the average American household some $1,600. It's time for his wealth to be confiscated: it might be only a drop in the bucket compared to AIG's total losses, but it would feel very right. David R. Kotok, co-founded of Cumberland Advisors, writes for The Big Picture: Whether we like it or not, America's federal policy is now driven by the need to avoid another "Lehman." Thus, we see increasing federal monies applied to support AIG. And, we see this elsewhere as my colleague, Bob Eisenbeis, noted about Citi in his comments today. There are no limits to the amount of federal credit that can be extended in support of this new policy. The Federal government is now committed to do whatever it takes, in whatever amount is necessary and with whatever tools are needed. If you believe as I do, that the economy will find some bottoming in 2009 or early 2010, then one has to view the future risk several years from now as inflation, not deflation. For today, inflation is not the risk, deflation is the threat and enormous new federal credit is the weapon used to confront it. That's what the AIG bailout is all about.Essentially taxpayers own 80% of the company, and although it will not be nationalized, as the government has stated, it is just a formality. It seems that letting AIG fail has become so risky it has essentially become a global problem, and that sweeping the egg shells so to speak under the rug would be almost impossible. It also means that U.S. taxpayers own a piece of that risk. Overall, the situation is ironic because AIG, which was once a great American insurance company essentially built to protect the interests of its clients, is now a large liability, and essentially insurance companies like to be risk averse, especially when doing business. - Maria Woehr Categories Deal Video
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