Late on Tuesday the Fed seized control of American International Group (“AIG”) to prevent a bankruptcy filing by the nation’s biggest insurer. Apparently, the Fed concluded that AIG was “too big to fail” and that its bankruptcy would have had potentially catastrophic impact on the world’s financial systems. In a prepared statement, the Fed said, “A disorderly failure of AIG could add to already significant levels of financial market fragility.”
AIG’s problems were largely attributable to the subprime crisis and resulting credit crunch. The company was heavily involved in issuing guarantees on collateralized debt obligations that were backed by mortgage securities. When subprime problems arose, housing prices fell and the credit crisis evolved, AIG was forced to incur significant losses.
Under the Fed’s bailout plan, the government will loan AIG $85 billion and will receive 79.9% of the company’s stock. The loan, which is repayable in two years, will give AIG time to sell various of its business operations in an orderly manner or otherwise develop means to repay the Fed.
While the Fed claims that taxpayer interests will be protected, there is significant doubt about this. First, there is significant doubt about whether AIG’s assets are really worth what it has reported in its financial statements. While AIG recognized a $5 billion loss in its August, 2008, filings, recent reports have suggested that, if AIG had taken the same write off on mortgage-backed securities that Lehman Brothers took in its most recent filing, AIG would have been forced to recognize a loss of $15 billion in August. This simply underscores the fact that the government is buying a “pig in a poke.” Second, it is important to note that the Fed’s intervention occurred only after attempts to negotiate private market solutions to AIG’s problems failed to materialize. Stated another way, private institutions, in business to make profits, were unwilling to subsidize AIG’s operations. Thus, it would appear that the claim taxpayers are “fully protected” is simply not an accurate portrayal of the real situation.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing clients with investment and insurance problems. For further information, please contact us.