Insurance giant American International Group on Monday set a new benchmark for corporate losses, losing nearly $62 billion in the fourth quarter of 2008.
Most of that loss was on paper, not in cash. But all that red ink spooked the stock market — the Dow Jones industrial average plunged more than 300 points to close well below 7000.
AIG's predicament would have been even worse had the government not thrown the company a new lifeline of taxpayer-funded support.
AIG's Ancillary Businesses
AIG was once the world's biggest insurance company, with operations in more than 130 countries. But CEO Edward Liddy told NBC's Today show on Monday that the detour from traditional life insurance and property insurance into complex financial products has been disastrous.
"Our insurance policyholders — they are in good shape. They're secure, protected," Liddy said. "It's all the other ancillary businesses that are causing this. And it's the decline in asset values around the globe."
AIG has been trying to sell off parts of its business, but Liddy says would-be buyers are having trouble raising money as a result of the worldwide credit crunch. He made no promises in a conference call Monday about how quickly the restructuring might be completed.
"You know, we'd like to do it tomorrow. But the practical reality is the marketplace is a pretty crummy place to be right now," he said. "You all see that. When the world catches pneumonia, we get it, too, in spades because we are so large.
"We want to execute this plan in a diligent and deliberate fashion as quickly as we can."
AIG almost didn't get that chance. Credit-rating agencies were considering downgrading the company, a move that might have forced AIG to post billions it didn't have in collateral. That downgrade was headed off, though, when the federal government stepped in to rescue the company for the fourth time since September.
"They did get a little bit more breathing room," said Morningstar analyst Bill Bergman.
Bergman said the Treasury Department is buying extra time for AIG by making available another $30 billion from the bank bailout fund. The government is willing to forego dividends on that money and another $40 billion the Treasury had already loaned AIG. The government also agreed to accept a lower interest rate on money the company borrowed from the Federal Reserve.
"They made a lot more money available on top of the money that was already there, and they also eased the terms on which people can access that funding," Bergman said.
So why is the government being such a pushover? Two words: systemic risk.
AIG is so entangled with its insurance customers and big banks that allowing it to fail would pose huge risks to the taxpayers and the economy as a whole. Liddy said much of the money the government has already loaned his company quickly made its way to the coffers of other firms.
"This flow of funds through AIG to other financial institutions is a good indication of how intertwined we are with the global capital markets, and how government actions that are thought of as strictly assistance to AIG have benefited the entire financial sector," he said.
Warren Buffett's Analogy
Billionaire investor Warren Buffett warned in his annual letter to shareholders over the weekend that complex financial products — like the ones AIG was selling — are a time bomb precisely because of this web of mutual dependence.
With typical frankness, Buffett wrote, "Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It's not just whom you sleep with, but also whom they are sleeping with."
"AIG, for instance, might have been in a contract with one other bank, but that other bank also has contracts with three or four or five or 60 other different banks," Bergman said.
Bergman's favorite line in the Buffett letter is the one that comes next: Summing up the notion of "systemic risk," Buffett wrote that companies with the best chance of getting government help when they are in trouble are the ones that sleep around.
"There's an incentive to threaten us and perhaps even cause the loss that's being insured against," Bergman explained. "Because that helps get your government aid."
And now it is the taxpayers who are deeper in bed with AIG than ever.