Why US keeps backstopping a flattened AIG
It pledges $30 billion more, amid insurance giant’s record losses.
After Lehman Brothers failed in September, the financial markets froze up, causing interest rates to jump despite vigorous efforts by central bankers worldwide to keep credit flowing. Would the same thing happen – or perhaps something worse – if the US let troubled insurance giant AIG (American International Group) fail?Skip to next paragraph
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Yes, is the reply from the US Treasury and the Federal Reserve, which added another $30 billion commitment to AIG on Monday. This increases taxpayers’ pledges to the company to $180 billion – about the same amount to be spent this year under the just-passed economic stimulus package. It is the fourth time Uncle Sam has had to backstop the company.
“AIG by itself is not important, but it is intertwined in so many other aspects of our financial life and so many people rely on it in one form or another,” says Stan Collender, a partner at Qorvis Communications in Washington. “If AIG were allowed to go down, it could lead to possibly a global depression.”
AIG provides insurance to 100,000 entities, including small businesses, municipalities, 401(k) plans, and Fortune 500 companies, which employ more than 100 million Americans, notes a joint statement Monday from the US Treasury and the Federal Reserve about the complex financial transactions involving the company. In addition, AIG has 30 million policyholders and provides retirement insurance for hundreds of thousands of teachers and nonprofit organizations.
Unsettling to markets
The additional US financial commitment comes the same day that AIG reported a loss in the fourth quarter of $61.7 billion, the largest corporate loss ever in one quarter. Though the dismal news had been telegraphed late last week, investors drove up the value of the US dollar as they scrambled to buy US Treasury bills.
On Monday morning, the stock market reacted badly to the AIG loss and the turmoil in the financial markets. The Dow Jones Industrial Average quickly dropped below 7000.
The markets are unsettled in part because the government appears to be stumbling from one financial crisis to another, says Mr. Brown. “We need some kind of financial stability for a long-lasting recovery.”
For its part, AIG characterized the latest government effort as a restructuring that will strengthen its capital base and reduce the amount of money it owes taxpayers. The latest commitment by the US will allow AIG over a five-year period to raise $30 billion of capital by issuing noncumulative preferred stock to the US Treasury when the company needs the money.
At the same time, AIG said the government’s preferred-stock holdings will be modified so that they “more closely resemble common equity.” This is similar to what the US is doing with Citigroup.