AIG Crisis Is Hitting Close To Home

American International Group is facing a serious liquidity crisis and potentially a complete failure. However it’s being saved by the U.S. government who loaned $85 billion dollars to AIG and assumed 79.9% stake in the insurance company. Personally, I don’t like the idea of government bail out, because I believe these companies should have done their due diligence and practice financial responsibility — or face the consequences. However, I can’t say I am complaining about this bailout because this one is hitting really close to home.

Photo by TheTruthAboutMortgage via Flickr

My wife’s family owns an AIA insurance agency in Thailand (AIA is a subsidiary of AIG). If AIG faltered, the agency would suffer hardship, if not worse. Potentially hundreds of friends and family could be out of work. Even if another insurance company comes along and buy out AIA, consumer confidence would still be shaken making it harder to sell insurance products. Moreover, many of them — including my wife and in-laws — have substantial amount invested in AIG policies. In any case, I do not want to see these hard working individuals suffer because of poor decisions made by another division of the company.

Now for a less personal reason…

AIG is one of the world largest insurers and its fate is intricately woven into the fabric of the U.S. and world economy. To understand the extend of AIG’s business, here’s a quote from The Associated Press:

Besides life, property and other insurance offerings, AIG provides asset-management services and airplane leases. Its myriad businesses are also linked to mutual funds, annuities and other retirement products held by millions of ordinary Americans.
But perhaps the biggest concern about AIG is the dizzying array of complex financial instruments it structured for commercial banks, investment banks and hedge funds around the globe — many of which were directly or indirectly linked to the value of U.S. mortgages.

Many financial institutions use AIG as their insurer against bad loans and mortgages. Without AIG, many banks will be exposed to these financial liabilities and could meet its fatal end. This could create a domino effect that further fuel the current crisis.

I hope that the $85 billion will be enough to keep AIG afloat long enough to perform proper damage control. However, many investors seem to think that the bailout might not be enough based on yesterday sharp decline.

On a different note, this highlight the importance of choosing a stable insurance company, as opposed to going with whomever is the cheapest.

9 Comments

J
September 18, 2008, 15:05

If it is decided that government intervention on the part of these private companies is a necessity in the “bad” times, then it is time for these companies to start forking over a bigger part of the profits in “good” times to the government to form a separate pool of money to be used as a “rainy day fund”.
I’m a staunch free-market capitalist, but this policy of “privatizing the profits, and socializing the risks” must end!
Julie
September 18, 2008, 18:37

I feel for the families affected by this crisis. I hope that everyone finds a job! I am lucky to work with ShoreBank – I think it’s the bank’s commitment to the environment and green lending, the community, and social responsibility that makes it so successful.
Jerry
September 19, 2008, 7:46

In response to Julie, ShoreBank sounds like an interesting company. I think you’re right, though, regarding your bank’s sustainability (no pun intended) in this uncertain economic climate may just be due to its commitment to the environment and green lending. I think it’s the next huge thing in finance. More and more people are looking for companies that care about these things. More and more folks know that being green our insurance for the future. I hope the downturn does not lead to more and more crises.
Pinyo
September 19, 2008, 8:14

@J — Excellent point. I can completely agree with your point!
@Julie — Thank you Juile. I think they’ll be fine for now.
Data Entry Lady
September 19, 2008, 8:26

Tough economic times for sure. Hitting close to home for me as well – my son works for a company who’s main client is Lehman Brothers. We’re waiting to see how it pans out.
patrick r
September 19, 2008, 19:07

it’s hard to object to the government’s mass bailouts since similar debt-producing methods were put into action to bring the U.S. out of the Depression; maybe we’ve had a heart for socialism all along…
flippy
September 22, 2008, 10:09

I absolutely hate the bullshit that Congress is doing. Bailing out the airline pensions, then Fannie and Freddie, then Bear Stearns, finally AIG. I believe people should become violent, and simply terrorize the ones responsible. American patriots of old did this all the time. If this is not your cup of tea, do to a lack of cajones, then allow me to lend you some passive actions you can take.
Like David Letterman, here is my top ten list.
1. Convert your money to another currency. Owning U.S. money is like owning stock. If the U.S. is full of shit, then change toilet paper brands. The massive deflation of printing funny money to AIG is only going to weaken your dollar. A two dollar loaf of bread will become four or more. Change your money to buy bread in the future. Push to remove penalties and charges for changing U.S. dollars into other monies or standards like gold.
2. Write your congressman. Find their damn home number and call them at all hours of the night. Break apart the lobby system. Find out who is lobbying, and screwing up your life and never purchase from them again. Tell all of your friends to do the same.
3. Try to set up a system where the people’s vote usurps Congressional power like in state governments. We the people can amend amendments all the time at the state level. How many signatures does it take to undo the Congressional approval of AIG. How about removing the requirment that we have to buy insurances like those for our cars.
4. Remember this day, and engrain it in your mind. Never, ever invest in the stockmarket or America again. Allow the stock market to truly crash so that even the government cannot bail out the bullshit. Last time I checked people learn best through pain and suffering. Nationalize and government control things like energy, health care, and above all insurances. Use your head. You do not need to go overboard, and all we need is cheap basic standardized policies. For example, if people want million dollar transplants that will prolong a short period of life, then let them buy the expensive insurance. You will always be covered for being mangled in a car accident. Trust me, this would be cheap, and not even equal funding like socialized countries like Canada.
5. Act quickly because the world is poised to screw over us American’s, and they will soon be flooding us will all of our worthless dollars. Prepare for the Sith invasion.
6. Fix the Glass-Steagall act A.S.A.P. This repeal allowed banks to mix hedge funds with commercial or simply risk markets with solid investments. Banks never go under in any economy if their simply commercial. Of course they don’t make great profits either. The great depressions taught us this lesson and set the Glass-Steagall act up. The republicans, and the democrats for that matter overturned this wise approach in 1999.
7. The entire republican party has to be destroyed politically because they are the worst, and you need to watch the democrats and any new formation of parties until you can transition to a truly independent party. Simply choose someone off of the street. These people could not do as much damage as party politics.
8. Do not forget to break apart the monopolistic system. 50 seperate entities should be a good number. Microsoft is the only operating system for P.C. break the sucker up. Boeing and a few other national security and airline groups need to be broken up as well. Auto industries should be cracked to pieces. Banks should really be broken up and not be able to centralize over state boundaries like we had before. The Time Warner media giant that went untouched in its merger needs to fall. Smaller companies like Dentsply that control most tooth implantation are wrong. Do your part and ask where your money is going and support the smaller businesses until we get a congress that breaks up monopolies.
9. Make every aspect of what we pay for in the government open to the public. Finances, time, etc. need to be available at the click of a mouse, and there is always someone bored enough to check their records.
10. If all else fails, leave the country. Many people on these blog sites will tout you to just get the hell out. Leave the ignorant behind, and take your skilled labor elsewhere. When they cart America off to the auction block, you can come back and buy all that you lost.
Pinyo
September 22, 2008, 11:34

@Patrick — Yep, this does smell like a socialist thing to do.
@Flippy — I am speechless.
Julie
September 22, 2008, 13:54

Jerry – I agree with you about green lending being the next big thing in finance. Part of me wonders whether these rocky times are really just a reflection of the transition, and are actually a good thing. The old model seems limited in scope, financially, as it relies upon resources that are not renewable. ShoreBank is an interesting company, if you look into the history of the bank you’ll see that it’s true that they’ve been doing green finance since their inception in 1973.