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Will AIG Need More Taxpayer Money?

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Will AIG Need More Taxpayer Money?

Economy

Will AIG Need More Taxpayer Money?

Will AIG Need More Taxpayer Money?

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The U.S. government has again propped up insurance giant AIG. It's the fourth time the government has intervened to save the company. The question is whether an additional $30 billion, on top of the $150 billion already committed, will be enough to save the company. Some analysts believe government aid to AIG will peak at $250 billion.

LINDA WERTHEIMER, host:

This is MORNING EDITION from NPR News. I'm Linda Wertheimer.

STEVE INSKEEP, host:

And I'm Steve Inskeep. One question now facing the US government, not to mention the public, is whether four bailouts of AIG will be enough. The US government has decided again to prop up the insurance giant. AIG got into huge trouble as the world's biggest seller of credit default swaps. It ensured investors against defaults on bonds and mortgage back securities they held, so they were stuck holding the bag when some of those investments went bad. The question is whether an additional $30 billion on top of $150 billion already committed will be enough to save one company. NPR's John Ydstie reports.

JOHN YDSTIE: Yesterday, AIG reported that during the fourth quarter of last year, it lost nearly $62 billion - the biggest loss in corporate history. Unfortunately, US taxpayers own almost 80 percent of the company, and yesterday the government eased the terms of its loans to AIG while deepening its equity stake. The relationship began back in September when the treasury and the Federal Reserve rescued AIG because of fears that its collapse would bring down the global financial system. Yesterday, White House spokesman Robert Gibbs defended the additional aid on the same grounds. But Phillip Phan, vice dean and professor of management at the Johns Hopkins Carey Business School says the government has mishandled the situation.

Professor PHILLIP PHAN (Vice Dean and Professor of Management, Johns Hopkins Carey Business School): The very actions of the government is actually contributing, in my opinion, to sort of a lengthening of this very painful process which, you know, could easily have been taken care of, you know, a year go.

YDSTIE: Professor Phan argues that the US government should have forced the bankruptcy of AIG, brought all of its lenders, counterparties and stakeholders to the table, and made them accept some fraction of the money they were owed. He's not convinced the effect on world credit markets and the economy would have been any worse than what's unfolded over the past couple of months. But he says as long as the government continues to write checks, none of those stakeholders will be willing to negotiate.

Prof. PHAN: So, if I was inclined to say, all right, you know, you owe me a dollar. I'll take $.50 on that dollar and let's just call it day - there is no incentive for them to do that now. The incentive is to wait for the next check or the next guarantee, if you will.

YDSTIE: But Donn Vickery of Gradient Analytics, an independent research provider, says forcing AIG into bankruptcy would have been a big mistake.

Mr. DONN VICKERY (Co-founder, Gradient Analytics): If AIG goes under, I think it would take a number of other banks under with them.

YDSTIE: Vickery, who's been following AIG closely for more than a year, says the insurance giant is simply too intertwined in the financial system through its credit default swaps.

Mr. VICKERY: You can think of it almost as a game of musical chairs. You know, right now, everybody is relatively well hedged in terms of credit default swaps, except for AIG, which didn't hedge their exposure. If AIG goes under, that lack of hedging or that exposure passes on to the next party.

YDSTIE: Essentially, AIG pulls the chair out from under one player, who pulls the chair out from under another. Actually, it's more like dominos knocking each other down than musical chairs. And Vickery says Professor Phan's idea of getting everyone together to agree to take their losses is in impractical.

Mr. VICKERY: It's very difficult to do because of the, you know, the long chain of IOUs that are involved. I mean, to unwind one position, while it may sound easy, it's difficult because that involves adjustments all the way through that chain of IOUs.

YDSTIE: The other issue is that some of the credit default swap contracts that AIG owns will settle without losses given enough time, as contracts expire or AIG chooses not to renew them. Already, Vickery says, the company's exposure in the CDS market has been reduced from $600 billion to $300 billion. And the revised government rescue plan will help give AIG time to reduce that exposure even more. The easier terms in the revised deal do raise the risk of greater losses for taxpayers, says Vickery, but they lower the risk that AIG will go bankrupt can cripple the financial system.

Mr. VICKERY: It's about the best we can do in the circumstances, though we are taking on more risk in terms of not getting our money back from AIG.

YDSTIE: Vickery does agree with Professor Phan that AIG will, unfortunately, require even more aid before it's over. He believes the government's obligations are likely to peak at $250 billion. He does believe taxpayers will get some of that back, but he says they'll be lucky if the final cost is under $100 billion.

Just for comparison, the cost of dealing with 750 failed savings and loans during the S and L crisis was around $150 billion.

John Ydstie, NPR News, Washington.

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Amid Huge Losses, AIG Gets Another Lifeline

Amid Huge Losses, AIG Gets Another Lifeline

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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."

Systemic Risk

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.

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