An Update on the Wall Street Crisis and AIG

We wrote earlier today that insurance giant, American International Group (AIG) is having significant financial problems.

  It seems that AIG and New York State have agreed to a temporary fix so that AIG can use $20 billion of its insurance subsidiaries assets as collateral for bridge loans.  AIG needs the cash in order to maintain its credit ratings.

We have very mixed feelings about this.  Essentially, AIG is using its insurance reserves for a short-term loan.   The state mandates that a certain amount of an insurance company’s assets be kept as reserves for the payment of claims.  In so many words, the insurance regulators have treated an insurance company’s reserves as a “lock box” which is not to be touched so that the insurance company has the ability to pay claims.

New York’s Governor has endorsed this deal and has stated that AIG is in sound condition.  In the worst case scenario, AIG’s subsidiary insurance companies will not have enough money to pay claims.  In that event, such insurance companies will have to be taken-over by the states where such insurers are licensed.  If such occurs, New York will end-up bailing-out these insurance companies.

We think that this is bad precedent. 

Again, we will have to wait and see and keep our fingers crossed.

Mark E. Seitelman, 9/15/08,


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