ABC’s Business Correspondent Betsy Stark from New York: Before this is over, AIG may earn the dubious distinction of being the mother of all bailouts.
The U.S. taxpayer was on the hook for $150 billion before today’s $30 billion lifeline from the TARP, round 4 of government efforts to save AIG. What taxpayers have gotten in exchange is an 80 percent stake in a monstrous global insurance company now trading on the open market as a penny stock, i.e., worth well less than a dollar a share.
AIG has lots of good businesses that still make money but not nearly enough money to cover the cost of AIG’s disastrous bets on "credit default swaps". In simplest terms, AIG sold insurance policies on the trillions of dollars of mortgage-backed securities that made financial firms a fortune as housing prices went up. And for a time it made AIG a fortune, too.
But now that the tide has gone out, to borrow Warren Buffett’s metaphor, we see that while AIG insured approximately $450 billion of these securities, incredibly, it failed to set aside any funds to cover potential losses. Why? Credit default swaps were not considered a traditional insurance product so they were not regulated, so AIG was not required to set aside money for potential losses. And here’s the kicker (as explained so well by Joe Nocera in his 2/28 column this weekend in the NYT): the customers who bought these products all felt safe, too, because these securities carried the coveted "AAA" rating, conferred because AIG itself was, once upon a time, so well run it deserved it. OK, but why does the federal government–i.e., American taxpayers with plenty of problems of their own– continue to bail out this company that behaved so irresponsibly? Isn’t this is a classic example of the government throwing good money after bad? Today the Treasury Department conceded this $30 billion bailout may not be the last: "This will take time and possibly further government support, if markets do not stabilize and improve." But it went on to explain its belief that AIG’s long tentacles have the government in a chokehold: "Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high. AIG provides insurance protection to more than 100,000 entities, including small businesses, municipalities, 401(k) plans, and Fortune 500 companies who together employ over 100 million Americans. AIG has over 30 million policyholders in the U.S. and is a major source of retirement insurance for, among others, teachers and non-profit organizations. The company also is a significant counterparty to a number of major financial institutions." In other words, the government believes it faces a terrible choice: bail out AIG or risk bailing out all the businesses, cities, retirement funds, and individual Americans AIG still insures.