American International Group (AIG), once the world's largest insurance company, this week announced that it lost $61.7 billion in the fourth quarter of 2008, the biggest such loss in U.S. corporate history. With 74 million customers worldwide and operations in more than 130 countries, the U.S. government fears that if AIG fails, the results will be catastrophic for the entire financial system.
So this week, for the fourth time, U.S. taxpayers funded a massive infusion of money into the company's balance sheets. The government has now spent more than $170 billion to save the company -- and success still isn’t assured. RFE/RL correspondent Heather Maher asked Douglas Elliot, an expert on business and economic policy at Washington’s Brookings Institution, why AIG is so important and how much more the government might be willing to spend to save it. RFE/RL: The quarterly loss AIG just reported is breathtaking in size. Why is this company having such a hard time keeping itself afloat, even after the government has given it billions of dollars?Douglass Elliot:
The main reason that AIG is in trouble is that in addition to a lot of very fine insurance operations, it also set up a group called AIG Financial Products. And this group took huge risks. It was operating like a giant hedge fund and was very lightly regulated. And it managed to lose AIG tens of billions of dollars, and in doing so, it endangered the rest of the company, which has then had a series of problems, with customers worrying about dealing with them, with employees leaving, and of course every financial institution right now is losing money because their investments are going down, like everybody else’s investments.RFE/RL: This is the fourth time since last September that American taxpayers have been called upon to rescue AIG from collapse. It brings the bailout commitment for that one company to some $160 billion. Why is the government so willing to spend such massive amounts on it?Elliot:
There are two reasons that we keep pouring money into AIG. The original reason, and it’s still important, is that AIG had set up a huge range of financial contracts with many other financial institutions, which would lose a lot of money if AIG were not able to meet the commitments that it made. So the worry is that there would be a domino effect, and AIG going under would cause a number of other banks to have serious problems.
The second reason, though, is that after we started putting money in, we effectively as taxpayers own about 80 percent of AIG. This is our company now, and just as any other investor who owns a company, if we see that putting in some additional money could keep us from losing most of what we’ve already invested, it makes sense.RFE/RL: AIG does business on a large scale globally. So if it collapsed, the consequences wouldn’t be limited to the United States.Elliot:
AIG is the most international insurance company in the world. The effect of AIG going under would be felt all around the world, though I will say if AIG went under, they would still have many good insurance operations that would continue to operate. So that would cushion the effect on the ordinary person.RFE/RL: Where will the government aid to this one company end? Is it going to be an open-ended lifeline, or will it reach a limit at some point?Elliot:
I think in practice, this is going to be a pretty open-ended commitment. The positive aspect of this is that AIG has some very good insurance operations, which are worth a lot of money. If we were to just walk away and let AIG completely fold, we would lose a lot of the value that’s there. So it’s going to keep making sense for a while to show additional financial support.
Now there may come a point where it doesn’t make sense, but I suspect that it will continue to be a good investment for a while -- putting in some additional money to make sure we safeguard what we already invested.
RFE/RL: Has the money the government put in so far paid any dividends? Is the return on taxpayers’ money simply the fact that the company hasn’t failed yet, or are there other promising signs?Elliot:
Well, the biggest return on the money is, as you suggest, the fact simply that AIG has not gone under and not created this domino effect that has been so worrisome. I don’t think there’s been a lot of other good news from AIG. But again, that’s not unique to them. It has been a miserable few months to be any kind of financial institution, and AIG has suffered along with the rest.RFE/RL: What do you make of the calls from some quarters for the Obama administration to develop a more comprehensive approach to the troubled financial sector and begin a government-run restructuring, or nationalization program?Elliot:
We could nationalize AIG. It’s not quite clear what the advantage would be. AIG is already trying to do what we want them to do, which is principally to find a way to sell off some of their better units so they could start paying us back. It’s not at all clear that having some government administrator in charge would make any difference.
Again, one of the problems is: this is a really bad time to try and persuade someone to buy a financial institution of any kind. So even though AIG has some very good units, people are not offering them very much money. And so unfortunately, it probably makes sense to just hold on to them for a while until pricing gets better. RFE/RL: Finally, do you feel that the government’s position toward AIG -- its willingness to pour huge sums of money into it to keep it from failing -- has helped restore investor confidence that the government is enacting policies that will eventually get the economy moving again?Elliot:
I think that if the government had failed to save AIG it would have sent a very negative signal and could well have precipitated the financial meltdown that we had been worried about earlier. We could probably absorb it now but it would be a very ugly situation.
I’m not sure that providing the support has created confidence, but I think it’s avoided the markets losing much more confidence.
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