Economics Financial Crisis The Opinionsphere

AIG Explains Why It Is Too Big To Fail

The short answer: Yes.

The longer answer: This “Strictly Confidential” document that appeared on Scribd appears to be the same one that Andrew Ross Sorkin described last week in the New York Times as “getting a lot of attention” “inside the corridors of power in Washington.” The presentation is not addressed to anyone explicitly, but it appears to be meant as a kind of briefing on the importance of bailing out AIG for Congressmen and other second-level decision-makers unfamiliar with finance. As is my occasional practice, I’m excerpting some of the more important/interesting points raised in the document for convenient citation later.

This first point is obvious, but still bracing to hear from the source:

Without additional federal tools being deployed in the AIG situation, AIG will not be able to repay its obligations. Despite adequate current security against the U.S. government’s investment, that investment may not be recovered. 

Although some critics of the current approach have begun to question whether the collapse of Lehman led to the fallout that immediately began, it seems pretty clear to me as well as to most who were in the loop at the time that the fallout was the result of Lehman’s collapse. AIG wants to point out that the government did not adequately understand what would happen with the fall of Lehman Brothers – and that AIG is far bigger, more complex and interconnected than Lehman ever was:

Just as the government was unable to predict that the failure of Lehman would lead to the collapse of the Reserve Fund, followed by much of the money market industry, the government would be even less capable of predicting the fallout from the collapse of a much larger, more global and more consumer-oriented institution such as AIG.

Then of course, AIG begins to explain how it’s subsidiaries are essential to the running of the government in general:
AIU insures the U.S. military, the U.N., U.S. and foreign embassies, and important commercial and other organizations worldwide, including the Panama Canal, oil rigs, trucking, marine cargo and Doctors without Borders.
AIU’s Defense Base Act program provides coverage to contractors in support of the rebuilding of the infrastructure in Iraq and Afghanistan.
Also, another subsidiary could take down many cities as:
AIGCI is the second largest U.S. investor in municipal bonds.
The report comes to the following conclusions:
  • Insurance is the oxygen of the free enterprise system. Without the promise of protection against life’s adversities, the fundamentals of capitalism are undermined.
  • The failure of the world’s largest insurer at a time of major global financial and economic instability will exacerbate the challenge of reigniting consumer confidence. 
  • Since life insurance has changed greatly in character over the last two decades – from just a basic provision of death and disability benefits to a vehicle for retirement savings and wealth accumulation – the effects of disrupting the industry are wideranging and significant. 
  •  There is a legitimate public policy rationale for regulatory reform of the industry, and the federal government continuing role in AIG’s destiny would be consistent with such a policy direction.

In other words, AIG is too big and too important to fail. It’s probably true – but it’s a big galling to hear a company asking to be bailed out – again and again and again and again – making it. Especially after that company just announced the largest ever quarterly loss in the history of capitalism.

%d bloggers like this: