Tuesday, September 16, 2008

AIG--The Feds Did the Right Thing and Only They Could Have Done It!

There is that old saying: "There are the bears, the bulls, and the pigs--and the pigs get slaughtered."

This past weekend I witnessed the most incredible thing I had ever seen in the insurance industry with the demise of the world's largest insurer--AIG. AIG was not just a company--it was a legend in the industry.

Now, a couple of days later, that has been trumped--in spades--by the United States Government taking over AIG.

If a year ago, or ten years ago, you would have predicted the demise of AIG no one would have believed you.

That the feds would, for all practical purposes, seize AIG is nothing short of science fiction coming true.

But I have to tell you the feds are right-on.

It will be an orderly unwinding and resturucturing of the company. That is the only possible good outcome for our economy and our financial system.

The reasons go way beyond the problems AIG has caused in the financial system with its insuring "credit default swaps"--the height of greed and stupidity. In the end, AIG bet the American housing bubble had no limit.

Sure they could have gone into Chapter 11. The problem is you can't put an insurer into Chapter 11 and avoid a run on the bank. When the run hits there is no orderly reorganization. The whole thing would fall like a bunch of dominoes in a matter of days.

Yes there are regulatory structures in the states that would protect policyholders. But never has a company with as many businesses in as many places failed. The regulatory safety net spread across all 50 states and any number of nations might have been overwhelmed by the enormity, and worse the complexity, of the failure.

The run would have come in the form of corporate and personal lines customers all rushing to get their business moved away from the company. Who would have wanted to be the last policyholder?

With the company's failure to raise capital at the top of the headlines, that run was maybe a day or two away at most.

I have no problem with AIG failing. It is the destiny they made for themselves.

But their failure had to occur in an orderly way or the rest of us would be among its victims--a part of the slaughter--not something we deserved.

The federal takeover will enable the company's many businesses to be sold off and merged into other companies operations that can continue their work and pay out their obligations--or remain as part of a restructured AIG. The millions of claimants, insureds, and tens of thousands of innocent workers can make an orderly transition.

Only the U.S. federal government was large enough to do this. The fact that there was no one else who had the $85 billion and could come forward made that point in the days leading up to the rescue.

The downside was something I don't think any of us can even contemplate.

The upside is that AIG is filled with literally dozens of very good businesses, that when they are sold off or remain in a smaller AIG, will likely yield a profit for taxpayers.

We are in territory we have never ever seen before. There are no precedents. A new book is being written.

I think the feds dodged one huge bullet for all of us in a way that wipes out 80% of the company's value for the people who screwed up what was an impressive company. 100% would have been better.

Paulson and company got guts. I'm glad their guts trumped any ideology.

I am also sure they would tell us this was the best out of lots of bad options.

I just hope they don't run out of money before the mess all of these pigs have created is over.
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