An article by the Associated Press this afternoon comes the closest I’ve seen in awhile to explaining, in plain English, why the Federal Reserve and U.S. Treasury seem hellbent on propping up AIG.
AIG, the world’s largest insurer, has tens of millions of customers and operates in 130 countries. What’s gotten them in trouble is a scam the company ran over the past few years called credit default swaps. These CDSs were essentially insurance policies sold by AIG and bought by other financial services companies and banks. What they were supposed to insure were the multitude of mortgage backed securities, aka, the now toxic assets. Only AIG and other purveyors of these CDSs bet that property values would continue to rise indefinitely – meaning they would never have to pay out on the “insurance” of the underlying investments. We know today that the bubble burst and AIG didn’t have the cash reserve to come even close to making good on all of its CDS obligations.Why was this a scam? Because they were selling insurance but calling it something different – a credit default swap – which was apparently enough for our government and others to turn a blind eye on the practice and not regulate it as insurance. If you talk to any honest insurer, you’ll find that in accordance with state and federal laws there are rules about keeping enough cash around to take of your potential liabilities. There are formulations for what these reserves should be.
Now, the question members of Congress and citizens of the United States have to ask themselves is how much money thrown at AIG is enough? On March 3, 2008, AIG closed on the NYSE at $46.69. Today, it closed at 42 cents per share. In the past 3 months, the company lost $61 billion. During the first AIG bailout, the company’s CEO said the taxpayers would be paid back within two years. It doesn’t look like that’s going to happen.
The argument, from the federal government goes like this: AIG is so intertwined in so many ways and so many places that if the government did not keep the company propped up, the fallout would be worldwide and would lead to a longer recession, more job losses and further loss of value in pension funds and 401ks.
One expert today was quoted in the AP article linked above saying that at least another $200 billion will be needed to finish restructuring AIG. I think it’s time for Congress or Treasury Secretary Tim Geithner to come clean about what more will be expected from honest taxpayers to bail out the greedy and reckless at AIG. I also think the argument needs to be made that the people behind the curtain at AIG did this to all of us — not some faceless corporation. There needs to be some measure of accountability for the people behind the scams at AIG.