AIG: why an insurance company failing is important in this banking crisis

Posted on: September 16, 2008

If you thought Bear Sterns and Lehman Brothers on the ropes was a big deal, prepare yourself.

American International Group, the insurance company you know as AIG, is teetering.

Why is that important news in bank crisis?

AIG is the largest insurance company on the planet, the 18th largest company of any kind in the world, with a reported $1 trillion in assets. AIG is a component of the Dow itself. It has also been the back-stop insurance agency of a lot of American banks who are finding billions in subprime mortgage paper is worth less and less daily. So much less, banking giants are actually failing. If American banks need an insurance back-stop and the insurance company happens to fail, then a lot of those very same banks will be even more vulnerable than they are now.

The American federal reserve let Lehman Brothers, as big as it is, die. Lehman declared bankruptcy yesterday, the biggest bankruptcy in American history.

The latest news on AIG- I picked this up from a news flash at the end of tonight’s Squeezeplay ( my favourite television show of all time) on the Business News Network, is that AIG has hired a law firm to draw up bankruptcy papers, if needed, repeat, if needed, for tomorrow (Wednesday), a deadline day if it undergoes such a process.

On October 9, 2007 the AIG stock price was $70.11. It’s been sliding a little since then. It lost 18 per cent of its value in one day last month, on August 7, 2008, after AIG reported a loss for the quarter of $5.4 billion. In the last three quarters AIG has lost $18 billion. Today the price closed at $3.95 a share on the New York Stock Exhange. That’s actually an improvement from a low today of $1.25 after an opening price of $1.85.

Where did that bit of confidence come from to push the share price up?

The federal reserve, it appears, has deemed AIG too important to fail. Tammy Luhbi of CNN Money reports the federal reserve has guaranteed AIG an $85 billion loan. However, as she reports, a downgrade of AIG’s rating by Moody’s and Standard and Poor makes it necessary for the insurance firm to raise more collateral, as much as $13 billion, which will make the federal loan come in handy.

How did this become as big a problem as it has? Those back-stop guaratees of AIG are referred to as a Credit Default Swap (you’ll likely hear the word “swap” on the news when referring to this) or a Collateralized Debt Obligation (CDO). A good article explaining those is from Time Magazine in March. A very good basic explanation on what swaps are is from this transcript of an interview on Market Place on April 1. A good story on what has happened today is this, from the New York Times, written by three of their writers.

The swap market deals with what should be solid investments, but are unregulated. They are deals made almost automatically, not between two people, but as a sort of sign-here guesture for things like municipal bonds.

Now a word about regulation and deregulation about the banking industry.

After the 1929 crash, President Franklin Roosevelt’s administration and the Congress of the time put into place some serious regulations for the American financial sector. One of those, out of Congress, was what became known as the Glass-Steagal Act. That 1933 law prevented commercial banks from risking depositor investments in the stock market. After the act came into effect, there were two different kinds of banks in the United States- commercial banks and investment banks.

Much of the banking regulations made then have unravelled. Who did the unravelling?

Here is an interesting story from Mother Jones, a magazine I hadn’t heard of until tonight. ( I live such a sheltered life.) A damn good magazine from the look of it. Anyway, this next story is a good way to end this post. It scared me more than the news of AIG having this much trouble. The story, written by David Corn, author of George W. Bush, Mastering the Politics of Deception, points out a key McCain advisor, Phil Gramm is the man who may have to take some responsibility for this whole subprime mortgage mess by encouraging deregulation of the banking industry as a United States senator from Texas. (If you’ve haven’t heard of him, you may have heard some quotes of his this year, saying America has become a nation of whiners and that American is undergoing a “mental recession”.) Until July Gramm was a co-chair of John McCain’s national campaign for the United States presidency. That interesting factoid should help unfog your glasses as you admire your Sarah Palin poster. Have a read.

Thank you for reading AardvarkCola


2 Responses to "AIG: why an insurance company failing is important in this banking crisis"

[…] On October 9, 2007 the AIG stock price was $70.11. It’s been sliding a little since then. It lost 18 per cent of its value in one day last month, on August 7, 2008, after AIG reported a loss for the quarter of $5.4 billion. …Original post by aardvarkcola […]

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  • wordbeeps: No, he doesn't deserve an apology. Who tweets during a funeral? If you do, expect feedback. I didn't say the mourners were faking it. I think they we
  • Holly Stick: Look you fuckwit, are you too stupid to realise that Ghomeshi was an actual friend of Layton's, when you tweeted to him that the mourners were faking
  • aardvarkcola: Thank you. I see the rest of your message now. i'm honoured to to have your words on my blog. That alone is a delight. Lawrence


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