Either that, or we are going to keep dumping money into a hole until somebody says stop.
There are many reasons that AIG is being propped up but a big one is this: too businesses would shut down if AIG was allowed to collapse. As the biggest insurance companies in the world, AIG took on risks (and charged a hefty premium for those risks) that few others would or could. Think about it...who insures the following types of things/activities?:
- the freighter full of Catapilar equipment being shipped to Chile, Australia, and China.
- the grain ship carrying wheat from a U.S. port overseas.
- the ship carrying Powder River Basin coal to foreign markets.
- the liability insurance to a chain of 500 hotels, or 50 shopping malls, or giant theme parks.
- the airline with 500 Boeing and Airbus jets in the sky at all times
- the factories making cars, furniture, glass, paint, steel, etc.
More than any other company, AIG provides that insurance.
None of these enterprises could open their doors or sail from port or leave the runway without the type of insurance that AIG underwrote. AIG provided more of this type of insurance than anyone else. Shut AIG down and some companies would literally shut their doors overnight. They would have no choice. Eventually they could get new coverage, but the disruptive havoc would be armageddon-like.
There are certainly other reasons — the counter-party risk with other financial institutions and the risk to portfolios of pension plans and otheer insurance companies — but just the basic operation of the economy would have been severly disrupted.
We’re essentially paying for an orderly wind-down of AIG operations as some customers move to other insurers. And yes, they do have foreign operations which benefit from this support, and that’s part of the price for avoiding severe pain.
AIG has around 300-400 billion outstanding in guarantees for mortgage backed securities.(credit default swaps) Many of these securities are backed by sub-prime loans. Because of the AIG guarantees, the banks holding the securities didn’t have to retain capital for them. If AIG goes under, then many of the banks holding AIG Default swaps will go under. It appears that there are enough banks that would go under to bring down the entire western banking system.
I believe that most of the other divisions of AIG are still profitable. It is the Credit default swaps that are bringing down the entire company, because they are the only things that didn’t require capital reserves to back up the commitment.
Either that, or we are going to keep dumping money into a hole until somebody says stop.