American International Group policyholders and claimants can breath a sigh of relief since the Federal Reserve has agreed to loan it $85 billion. AIG will not go into bankruptcy.
The loan is not without strings. It seems that the Treasury will have an equity position in AIG, and the federal government will have some say over things, such as whether dividends are to be paid and the selection of management. It also seems that the federal government has jumped ahead in line of payments before bondholders.
It seems to me that this is a Pyrrhic victory for AIG and perhaps for the economy. AIG has a not too silent partner in the US Treasury. AIG will be dismantled in that it has to sell companies to raise cash to pay-off the loan. AIG might be forced to sell its good companies at a discount, and it will have to sell its poorly performing companies at a steeper discount. In a sense, the federal government has bought AIG for $85 billion, and AIG will be liquidating itself with the hope that something will remain.
On the short term this is good news for our clients, i.e., people and businesses who have claims pending with AIG for either personal injury, property damage, or other losses which are in the claims stage or pending in the courts. An AIG bankruptcy would have placed a stay on all claims and pending lawsuits for about 1 year or so. If the AIG insurance companies had gone into either rehabilitation or liquidation, this would have been a mess for the New York State Insurance Department and the taxpayers.
On the larger picture we ask the following questions:
- Should the federal government be getting into the business of taking-over failing corporate giants? Under a free market economy if a company cannot survive it deserves to die while other, new companies spring forth out of the ashes.
- Is the economy better served if a failing company, no matter how big, is allowed to fail rather than be propped-up by the federal government?
- Should the federal government manage these companies which it has acquired, such as Fannie Mae, Fredie Mac, and now AIG?
“Hank” Greenberg, former AIG CEO
In connection with the loan, AIG has had another re-shuffling in its executive suite. Its new CEO, Mr. Liddy, was chairman of Allstate. We hope that he is up to the task in that Allstate is a traditional insurance company in the realm of personal auto and home. In comparison, AIG is a mix of traditional property and casualty and life insurance companies (both personal insurance and heavily in commercial insurance), non-traditional insurance companies (e.g., kidnap), financial services companies, airplane leasing, and risky financial insurance.
We wonder whether Maurice R. “Hank” Greenberg should have been reinstalled as its CEO? Mr. Greenberg built AIG, and he is considered one of the insurance industry’s best business leaders. He also has a huge stake in the company, i.e., 11% of its stock. Would it not make sense for a major owner to keep on an eye on his investment and the investment of his new partner, Uncle Sam?
AIG’s new boss?
Mark E. Seitelman, 9/17/08, www.seitelman.com.