There have been many complaints about the $150 billion pumped into AIG by we taxpayers, from the Fed Chairman, Senators, individuals, and MCM readers.
AIG is not too big to fail; it is too ‘connected’ to be allowed to fail. AIG provides the underpinning for many pension funds and retirement plans; its financial instruments guarantee the returns for pensioners. It backs up the investment of many banks. It owns many of the airlines’ airplanes, planes that might be repossessed if AIG goes under. AIG insures many Fortune 500 companies, and is among the largest writers of workers comp in the nation. It is a large individual auto insurer as well.
An article in today’s LATimes lays out a few of the myriad ways AIG is involved in the economy and individuals’ lives. It also describes how we got here:
” Beyond the more or less predictable consequences of letting a company like AIG go down are the murkier possibilities known as “systemic risks” — most of them arising from AIG’s rush in recent decades into all sorts of highly speculative businesses that were a huge departure from the staid world of insurance.
Some experts say what these ventures have done is make an AIG or a Citigroup that’s “too interconnected to fail.” And it’s not just the size that would matter. AIG’s interconnectedness with other companies, markets and economies is so huge and convoluted that it’s almost impossible to foresee what all the consequences of collapse would be.
The prime example of this problem is about $500 billion in unregulated credit default swaps held by AIG. Those complex financial instruments are essentially insurance policies taken out on mortgage-backed securities and other assets. The swaps were designed to pay out money to buyers who got caught in exactly the type of financial crisis taking place right now.
In essence, AIG was committed to insuring hundreds of billions, if not trillions, of dollars in investments. When the housing market crashed and the economy nose-dived, those investments tanked as well. And AIG was liable for the losses — a liability so large that it is now overwhelming the rest of the company, including the still-profitable parts.
What’s worse, because credit default swaps were unregulated and the layers of transactions so arcane that they are difficult to understand clearly, the true cost is essentially impossible to measure with certainty. Once the dominoes began to fall, no one knew where the process would end.”
What the Feds have done with the latest re-configuration of the bail out is to buy time – months during which the company can sell off assets, write down losses, and separate out the still-viable businesses from the essentially-bankrupt. As I predicted a week ago, the domestic insurance business will in all likelihood be spun off, raising billions to begin the repayment process. The Asian businesses will be carefully packaged for sale, a step necessary when potential buyers backed out ten days ago. The auto and life business will also be separated, sanitized, and sold off.
The resulting funds will go a long ways to paying us back. Not all the way, but a long way.
That’s all good. What isn’t good is AIG’s desperate effort to add premium dollars, an effort that by several accounts is leading the company to abandon all pretense of underwriting. Sources from headquarters staff at large competitors to several brokers around the country indicate AIG is quoting rates for P&C coverage that have only a ephemeral relationship to the actual cost of risk. The sense is that AIG is doing anything it can to add premium, and thereby build up the companies’ financials.
So, down the road – say in a couple years, the shortsightedness of this approach will become obvious. Even more obvious than it is today. Claims will come in, reserves will be needed to fund those claims, and it is possible, if not likely, that there won’t be enough capital to fund future claims.
What does this mean for you?
A very tough market to sell into – for now. By mortgaging its future, AIG is guaranteeing it will survive for a while, and may well be assuring its eventual demise.

That’s how NYS Insurance Commissioner Eric Dinallo characterized AIG’s derivative business during testimony yesterday. Mike Whitely of WorkCompCentral reported on the Senate hearings this morning, saying:
“American International Group’s financial products unit amassed a portfolio of shaky credit default swaps, futures and other derivatives with a notional value of $2.7 trillion before regulators stepped in to stop the bleeding last September, New York Insurance Supt. Eric Dinallo said Thursday.
“For context, that is equal to the gross national product of France,” Dinallo told the U.S. Senate Banking, Housing and Urban Affairs Committee. “Losses on certain credit default swaps and collateral calls by global banks, broker dealers and hedge funds that were counterparties to these credit default swaps are the main source of AIG’s troubles.”
There are lots of moving pieces here, but the most current problem is the inability of AIG to sell off assets to meet credit obligations. I discussed this issue in a series of interviews on Fox Business News earlier this week; the video is here and here.

The announcement today of the largest ever quarterly loss in US history hit the market hard, and will result in massive changes at AIG. These changes will include continued efforts to sell off assets, transfer of more control to the Federal government, and the spin off of domestic insurance operations.
A town hall meeting for all employees hosted by CEO Edward Liddy is in process even as I type this, and there are several key takeaways so far. First, the company will combine the American International Underwriters and Commercial operations units into one entity to be called AIU Holding; it will include 44,000 employees and operate in130 countries; this latter is somewhat surprising, but sources confirm AIU Holdings will retain foriegn P&C operations. The new entity’s CEO will be Christian Moore. This is a bit of a surprise as many employees expected Nicholas Walsh (the current AIU leader) to head up the new business. Moore is currently President and CEO of AIG P&C group; Walsh will be vice chairman and the chair will be named later.
At this point AIG has not publicly announced how they will handle employee stock, but the company is looking to implement increases in compensation and pay bonuses in March as previously announced. These comp changes are pending approval of the Feds, who will be consulted before any plans are finalized. Sources did indicate there appears to be some effort to establish a mechanism to provide stock and/or options to employees of AIU Holdings, but no details were available.
Liddy did not announce extensive staff reductions. However, earlier internal communications asked managers to take a look at their budgets and see where they can cut. No goals were provided; management was just asked to reduce wherever possible.
Beyond that, no other new news came out during the call, but Liddy did say that ‘the goal is to keep as many people as possible’.
Given the company’s desire to demonstrate it is doing all it can to raise capital, do not be surprised if there is movement on this fairly quickly. As I noted last week, these operations are profitable and solid, and as soon as the credit markets return to something approaching normalcy, there will be plenty of folks willing to buy into what is a strong business.
What does this mean for you?
That would be a good move. Operations could continue, policyholders would be protected, and a big chunk of money given back to the taxpayers.