The Housing Chronicles Blog: How AIG became "too big to fail"

Sunday, March 22, 2009

How AIG became "too big to fail"

With the rising populist anger over growing bail-outs -- especially of international insurer AIG -- Time magazine has a cover story on why the company became "too big to fail." From the article:

The reason AIG has cost taxpayers $170 billion — and the reason the Obama Administration seemed willing, at least at first, to hold its nose and accede to bonuses for the company's managers — is that it's too big to fail. It's an often heard phrase, but what does it really mean?

The idea is that in a global economy so tightly linked that problems in the U.S. real estate market can help bring down Icelandic banks and Asian manufacturers, AIG sits at some of the critical switch points. Its failure, so the fear goes, would set off chains of others, rattling around the globe in short order.

Although some critics say the fear is overblown and the world economy could absorb the blow, no one seems particularly keen on testing that approach....

AIG says it has written more than 81 million life-insurance policies, with a face value of $1.9 trillion. It covers roughly 180,000 small businesses and other corporate entities, which employ approximately 106 million people. That makes AIG America's largest life and health insurer; second largest in property and casualty.

Through its aircraft-leasing subsidiary, AIG owns more than 950 airline jets. Just for good measure, AIG is a huge provider of insurance to U.S. municipalities, pension funds and other public and private bodies through guaranteed investment contracts and other products that protect participants in 401(k) plans...

Keeping the financial system fluid might explain why so many banks got paid in full, which strikes some as a scandal way bigger than the bonus payouts. Many experts wondered why AIG paid 100 cents on the dollar.

Among the biggest beneficiaries of the AIG pass-through, at $12.9 billion, was Goldman Sachs, the investment-banking house that has been the single largest supplier of financial talent to the government. Critics have been quick to note — and not favorably — the almost uncanny influence of former Goldman executives...

Click here for full story.

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