How The Fall and Bailout of AIG Effects Everyone
How AIG Fell
American International Group, AIG, reported the largest quarterly loss in U.S. economic history on Monday. The $61.7 billion three month loss is mind boggling and leaves U.S. taxpayers shaking their collective heads and seemingly holding the bag.
Global markets reacted similarly. The DOW fell 300 points as the insurance giant’s 12 month loss stood at more than $100 billion. During this time, AIG has lost 99% of its market value.
Once again, taxpayers have come to the rescue as government officials revealed another infusion of cash totaling $30 billion and raising taxpayer investment to a startling $173 billion. The terms of the loan are dramatically changed from previous infusions and signal the severity of the deepening crises.
The new deal includes equity, lower interest rates and more credit clearly aimed at keeping AIG afloat. Even more importantly, the government has transitioned from “tough-love lender to a little more friendly equity investor,” say Terry Connelly, Dean of Business at Golden State University.
With taxpayers already heavily invested in troubled institutions like Citigroup, Bank of America and mortgage monsters Fannie Mae and Freddie Mac, the public has difficulty relating to the AIG dilemma.
The reality is that the failure of AIG would impact most persons who buy a home, purchase a vehicle, have a student loan, have insurance coverage or who are employees. American taxpayers may not realize it, but AIG is squarely in the middle of our economic profile.
How Bad is AIG?
The AIG statistics are overwhelming. The company has 74 million customers around the globe. 30 million of those clients are American based. AIG operates in more than 130 countries. Prior to the current market conditions, the company backed more than $298 billion in assets globally.
The company’s quarterly loss sent world markets into a spiraling crises. As the DOW lost 300 points, Asian markets toppled to new lows. Even a favorable A+ rating on the company’s four major Asian holding companies could not influence the lack of consumer confidence.
In fact, global investors correlate AIG’s demise to the breadth and depth of the recession. Many American taxpayers have begun to question the government’s strategy and handling of the bailout. As issues arise about AIG’s distribution of the proceeds from the initial bailout, President Obama’s stimulus package continues to receive criticism.
Billionaire Warren Buffett’s Berkshire Hathaway suffered its biggest-ever loss of 4.7% on Monday. Buffett echoed the popular theme that “the economy will be in shambles throughout 2009” and that AIG typifies the “reckless lending policies” that have led to the demise of world markets.
Realistically, President Obama arrived late to the bailout party. White House Press Secretary Robert Gibbs said on Monday, “we are focused on taking the steps necessary to restructure AIG that, in the long run, no longer pose the type of systemic threat that it poses right now.” The AIG problem existed long before the Obama administration took over, but the new president’s handling of AIG may very well become his benchmark for fiscal crisis management.
AIG Affects us All
Even as good news regarding gains in household income and increased consumer spending in January hit the markets, AIG dominated the scene. With more than half of the American population owning stocks and with markets reacting violently to AIG releases, every sector of the American economy, and indeed, the global economy, is affected by governmental actions to restructure the insurance monster.
Considering that since October of 2007 when the DOW hit 14,167, investors have lost 52% of their value and with a 25% fall since January 1st 2009, the bottom does not seem around the corner. Remarkably, the DOW has fallen from 8000 to below 7000 in just 14 trading sessions. On Monday, amidst the turmoil, crude oil dipped 10% and magnified the intensity of the product’s fall.
On Friday of this week, new labor department numbers will most likely reflect another 600,000 job losses. Unemployment has now reached more than 5 million Americans. Even as new stimulus jobs begin to kick in, production levels continue to shrink and layoffs outpace any growth.
Taxpayers and the government have so much invested that they cannot allow AIG to fail. And, the pit seems bottomless. Some economists project another $200 billion may be necessary to steady the wavering AIG flagship.
These figures leave taxpayers shaking their heads and wondering if the tail is wagging the dog. Accompanying Monday’s cash infusion, a joint statement from the U.S. Treasury and Federal Reserve saying that “given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high” did little to inspire confidence.
What’s Ahead for AIG?
Simply put, AIG is not a viable company. As such, the repercussions are far reaching and pose the biggest obstacle for the Obama recovery plan. The government now controls the company and CEO Edward Liddy’s representations that taxpayers will be reimbursed seem unfounded.
American International Group is a public burden that requires a systematic reduction in scale and definition of the size of future funding. The company then needs to be dismantled and broken into small corporations that can be profitable.
Although AIG is committed to pay down $38.9 billion by December 2009 by divesting itself of its two largest international life insurance divisions, there appear no takers in the wings. These companies are expected to yield a $26 billion return, but their values are declining by the day.
Additionally, AIG has provided the government with rights to the cash flow generated from thousands of life insurance policies. While the cash flow exceeds $8.5 billion, it seems a drop in the bucket compared to the giant’s exposure and risk. Even the U.S. Treasury describes AIG as a “systematically significant failing institution.”
The company is headed to a government reorganization and liquidation sale. The hope is that as the layers are peeled off, they can sustain market value. If AIG were to fail, Americans could expect a global chain reaction that would include a deeper recession and monumental unemployment.
As the government sets about returning the company to the private side, it is hoped that a broader sense of optimism will take place. Given the American propensity for entrepreneurial success, a rebound will occur and employment will rise as markets stabilize. To everyman, AIG is a burden, but its new look will most likely attest to the resurrection of the U.S. and world economy.