After $182 billion taxpayer rescue, is AIG on the verge of collapse?
Filed under: Company News
You may remember American International Group (AIG). The U.S. government gave it $182 billion of taxpayer money last fall in exchange for a 78 percent stake. Of that money, $165 million went for bonuses to a handful of people in its Financial Products Group (FPG), which sold Credit Default Swaps (CDSs) on which AIG lacked the capital to make good. And $200 million more is slated for those good folks in 2009.
Another $12.9 billion of our taxpayer money went to Goldman Sachs Group (GS) so AIG could pay Goldman 100 cents on the dollar for its CDSs. Hank Paulson wanted to keep the names of Goldman and the other recipients secret -- since so many of them were foreign banks, but the information leaked out in March 2009 after Paulson left office.
Now, thanks to some solid reporting in The New York Times, it looks like the rot at AIG is not limited to FPG. While AIG officials have claimed that its problems were isolated to FPG, the reality is that AIG seems to have been running something akin to a shell game of massive proportions. Its shell game version took the form of selling insurance and assigning the resultant risks among its 71 different North American insurance companies.
Thanks to AIG's regulatory arbitrage -- taking advantage of the fact that its 19 state insurance regulators never conduct examinations at the same time -- AIG may have been able to shift assets among the companies to fool state regulators. If one its companies did not have enough money set aside as reserves against future claims, AIG could move assets to that reserve-deficient company right before the state insurance examiner moved in. And once that examiner was gone, AIG could in theory shift the extra cash to the next reserves-deficient company.
Want an example? Consider AIG affiliate National Union (NU). AIG indicated to Pennsylvania state insurance investigators that it had $33.7 billion in assets at the end of 2008 -- more than enough to protect against $21.9 billion in liabilities. But what the Pennsylvania regulators did not see is that $10.9 billion worth of NU's assets were investments in other AIG affiliates, which are not publicly traded and whose value is hard to measure. Subtract that and you have only $22.8 billion in assets.
But wait -- there's more. NU had $42 billion more in liabilities that the Pennsylvania regulators missed. How so? NU had obligations to pay claims of other AIG insurance affiliates -- the biggest of which was $23.1 billion that it owed AIG affiliate American Home (AH). NU owed another $19 billion to several other AIG afiiliates.
Meanwhile, AH had crushing obligations of its own. While the New York state regulators thought it had $26.3 billion in assets to a mere $19.9 billion in liabilities, the reality was far more dire. How so? AH was on the hook for an additional $120.7 billion in guarantees to 16 other AIG affiliates. Thus AH's liabilities really exceeded its assets by $114 billion.
To summarize, AIG's core insurance companies seem to be like a shell game which AIG was able to continue operating because it was able to keep the cash moving from the affiliate that one state regulator had just examined to the one that another state regulator was about to examine.
Unfortunately, it would not surprise me if this was happening and continues to happen at all big U.S. insurance companies. Moreover, I would be shocked if former AIG CEO Hank Greenberg -- who has heaped scorn on his successors -- was unaware of this practice.
Is it too early to write off that $182 billion?
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. Follow petercohan on Twitter. He owns AIG shares and has no financial interest in the other securities mentioned.
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Reader Comments (Page 1 of 17)
7-31-2009 @ 8:56AM
Chuck said...
I think it's time to cut the strings and pull the TARP money out of AIG and send them into chapter 7. There has been too many TO BIG TO FAIL pulling the wool over the FED'S.
Send them to jail!
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7-31-2009 @ 4:14PM
Doc said...
This whole mess makes me sick. How many people could be provided health care for $165 million. Bonuses? Bonuses? For what? Running the economy into the bowels of hell? Stealing the investment money of thousands of people? Not another dime to AIG. Not a penny. Let them fail.
7-31-2009 @ 5:38PM
CentreCat said...
To those people who have studied/analyzed AIG this discussion of pyramiding assets isn't new. The company has been engaging in this practice for as long as I can remember. Moreover, its my opinion that not enough people have focused on the company's historical patterns of UNDERRESERVING its liabilities. I urge interested individuals to examine the Schedule P of the company's consolidated insurance filing and observe the magnitude of the underwriter's loss reserve shortfalls over an extended time period. This is a major reason why I'm skeptical that AIG will be able to pull-off an IPO of its property-casualty insurance subsidiaries. There's more: With the U.S. government guarantee post bailout, the insurer has been undercutting the price of its competitors to retain business and market share. IMO, this will ultimately lead to more losses for the company and U.S. taxpayers.
8-01-2009 @ 6:31PM
Mike McKibben said...
I agree, and perhaps about 1000 (or more) bank and securities fraud charges (for starters) might be at hand too. I'm not going to hold my breath on that.
10-23-2009 @ 1:58PM
rsbjr said...
Chuck my man, dud you hit the nail right on it's money stealing head!!
right on man!!!
7-31-2009 @ 8:59AM
Bob said...
The people of this United States should be extremely upset that the federal regulators allowed this shell game to happen, and will most likely continue to find new ways of funding the AIG debackle. AIG should be allowed to crumble, but we all know that AIG holds the congressional pensions in their hands (so that isn't likely to happen any time soon). Who pays, the people pay (or at least the people that pay their taxes pay !!).
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7-31-2009 @ 2:54PM
W. C. Peterson said...
You can thank our great Republican politicians dating back to Ronald Reagan for this debacle. Reagan campaigned on 'too much regulation" his entire career. And when he took office, he disbanded many of the protections put in place after the stock market crash of 1929. What he didn't rescind, his buddies Phil Gramm, Jake Garn, and Jack Kemp wrote out of the bills he got passed in the Republican congresses.
All of this financial ruin is solely the responsibility of the Republican Party. They all should go to jail
7-31-2009 @ 2:53PM
o640 said...
I guess most politicans failed history in school.
They don't recall why most civil wars & revolutions have happened - financial collapse of the state.
What happens when the tax base can't cover the cost of these falures?
7-31-2009 @ 9:06AM
marigwanna420 said...
how about we put up restrictions banning companies from getting "too big to fail"..... how about we also put up a nationwide salary cap of $1 million a year..... that will stimulate the economy big time..... prices on services and goods will drop, jobs will be created with all the extra money saved from the top, people will be spending money.... raises will be given........honestly, who needs more than 1 million a year..... anything more than that is pure greed, especially when most of the people with salaries higher than that dont actually do the work to warrant that kind of pay
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7-31-2009 @ 3:57PM
Lauren S said...
I'm sure Hollywood would just love the $1 million salary cap- all those big Obama fans (and financial backers) or do you think DC would find away around the cap for those people? LOL.
8-01-2009 @ 1:50PM
Wendell said...
How in all reason does capping salaries "stimulate" an economy?" Are you aware that the entire current healthcare monstrosity has it's beginnings in wage and price controls? Salaries represent what people earn for work. If you cap what people earn, you cap what people do. People who make a lot of money employ a lot of people in order to make that money. Oprah makes 270 million a year. I wonder what the entire payroll of harpo productions is. Envy is not an economic theory it is an emotion.
7-31-2009 @ 9:10AM
queen said...
Time to let AIG go into Chapter 7! Another big example of too much dead weight and corrupt greed!
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7-31-2009 @ 9:21AM
richard said...
There is no such thing as too big to fail. AIG has defrauded the taxpayers and the government of money while still paying out bonuses. No company receiving money should be paying out bonsues when the company is failing. That is rewarding bad behavior and should not happen. There should be mandatory salary caps, no bonuses, and limited expenditures of this company until the government money is repaid in full with interest. No more bailout for AIG or any financial company. Let them file Chapter 7, and break up the company and sell off the assets with the government being first in line to receive their money back from the sale.
As always, the law firms will always get paid enormous fees for processing the bankruptcy. That should be limited also to save the taxpayers money.
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7-31-2009 @ 9:20AM
Croppy Cait said...
'After $182 billion taxpayer rescue, is AIG on the verge of collapse?'
There's nothing wrong with another little bail out...and a wee bit more stimulus...
Brahahahahahahahahahahaha
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7-31-2009 @ 9:23AM
J Carr said...
Whats next ... let the govt sell arms to forign govts and funnel the profits to AIG to support their activities? LMAO, the class has once again taken it from behind. Just sad.
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7-31-2009 @ 9:30AM
acbntx2008 said...
If they are, screw em, let em go under....TO HELL WITH EM!
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7-31-2009 @ 9:37AM
hammer said...
i dont get it . didnt the regulators conduct suprise audits? if they didnt theres one big problem. you dont tell these too big to fail corps. that " hey i'm gonna audit you in a couple of weeks , so hide the bad assets" . it seems more and more that our government is and has been in cahoots with big business to raid the treasury. dont tell me that money was just on paper and is just gone . thats bull . it went somewhere.
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7-31-2009 @ 11:20AM
Dennis Rowe said...
Why don't all the states do the audits at the same time? That way aig can"t shuffle the money.
7-31-2009 @ 9:46AM
Donovan said...
With out question. Its time to stop ALL tax payer funded bailouts. And start sending some corporate CEO's to prison.
With all the money our Government spends, and all the lives that are lost in war's in order to protect the people of the United States Of America, from harm and threats of terrorism from other countries/nations.
Why is it we allow CEO's of corporations and banks to continue, to financially destroy our own Country, and the lives of the American people.
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8-02-2009 @ 10:49PM
Diana said...
I am so sick and tired of reading what I already knew would happen long before this article was printed. AIG and all the others should have been allowed to fail...no bail out was going to be sufficient enough to save them. The mement they gave bonus money to executives the bail out should have been taken back, their doors closed and bankrupcy proceedings started..along with criminal charges for all the thieves that have gotten off scott free with derailing our economy thus far. Now after the application of the biggest, most expensive bandaid ever AIG is on the verge of collapse again..... well fan me with a brick!!!