Insight, analysis & opinion from Joe Paduda


Taxpayers’ profit on AIG bailout

Yesterday brought the welcome news that the Fed completed the sale of the last of its AG holdings, generating a profit of $6.6 billion.
In total, taxpayers have earned almost $18 billion dollars from the Fed’s investment in AIG and subsequent sale of the company’s assets. We still own 53% of AIG, whose stock is up 46% so far this year.
The highly-controversial decision to use federal funds (taxpayer dollars) to prevent the meltdown of what was then the largest P&C insurer in the nation required $125 billion.
I – and everyone else – am happy and relieved that our dollars didn’t disappear. That said, I’m sure we’re all hoping we don’t have to make that kind of a bet again. What happened to AIG – a relatively tiny subsidiary somehow bankrupted a huge company – can’t be allowed to happen again.
AIG was so deeply entwined in international finance and business that we had no choice but to bail the company out when their investments in credit derivatives went horribly bad. While some would argue that government should have let the chips fall where they may, the cost – to individuals, taxpayers, governments, the economy, businesses – would have been catastrophic.
If the catastrophe was limited to AIG and its shareholders, fine – let ’em suffer. But it wouldn’t have been. In fact, thousands of companies, millions of individuals, hundreds of governmental entities would have been bankrupted/forced out of business/left without pensions if AIG had disappeared.
It’s one thing to talk tough about some fat-cat finance guy losing his Bentley and Gulfstream; it’s a whole different thing when your neighbors lose their pensions. And there’s no question an unmanaged bankruptcy of AIG would have led to that, and other consequences. Such as:
– AIG had very close financial ties to many European banks, ties that would have brought those banks down and done major damage to that continent’s economy.
– AIG provided the underpinning for many pension funds and retirement plans; its financial instruments guaranteed the returns for pensioners.
– It owned many of the airlines’ airplanes, planes that might have been repossessed if AIG went under.
– AIG insures many Fortune 500 companies, and is among the largest writers of workers comp in the nation.
– It was a large individual auto insurer as well.
– AIG insured billions of dollars of cargo in transit across the world’s oceans; a bankruptcy would have increased costs significantly.
AIG insured many other financial institutions against the risk of loss from those institutions’ investments. If that insurance was no longer there, the other financial institutions would have had to dramatically change their financial projections – which may well have led to their demise.
I’m no economist but it is abundantly clear an unmanaged bankruptcy could well have led to a world-wide depression of frightening proportions. The feds had to choose between a bad choice and a horrible one – and they chose the bad one.
Of late AIG has been a big buyer of non-government backed mortgage securities, adding stability to the housing market – a key to continuing the economic recovery.
What does this mean for you?
Let’s hope our elected officials are paying attention.

One thought on “Taxpayers’ profit on AIG bailout”

  1. Joe, I agree about the necessity of the bailouts for AIG, however it was my understanding that the downstream financial effects upon the insurance units were negligible or nonexistent due to statutory reserve requirements. Perhaps insurance claims would have been incurred as a result of insured’s losses but we know those exposures are usually shared in the reinsurance markets. Could they have been large enough to tank one of the AIG units? Can you or someone shed some light?

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Joe Paduda is the principal of Health Strategy Associates




A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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