The world's stock markets dropped like hanged men Monday on news that American International Group had posted a quarterly loss — not just lost any loss but the biggest corporate loss in U.S. corporate history.
$61.7 billion US is just… gone.
"The weakness seen around the world today shows that investors continue to have precious little faith in the various bailout and stimulus packages and have once again been forced to revise their expectations about just how bad the economic situation could get," said David Jones, chief market strategist at IG Index, a British financial firm.
What is AIG?
American International Group and its companies are major insurers the world over. While based in New York, it has extensive dealings in Asia. The U.S. Federal Reserve says AIG acts as an insurer for more than 100,000 entities, including operations that employ more than 100 million Americans, and has more than 30 million U.S. policyholders.
Why is it in trouble?
Problems at AIG did not come from its traditional insurance operations but primarily from its business insuring mortgage-backed securities and other risky debt against default.
Its serious problems began in September when Moody's downgraded its credit ratings, and AIG had to seek more cash for collateral against its insurance contracts.
While it would try to sell some of its assets, its problems required a huge cash injection that only a rich government could provide.
Why is the U.S. bailing AIG out?
If AIG doesn't have enough cash, it could default on its obligations and the buyers of its insurance. These are giant banks and financial companies. Without AIG, they would have found themselves without protection against losses on the debt they hold.
"It might not just bring down other financial institutions in the U.S. It could bring down overseas financial institutions," said Timothy Canova, a professor of international economic law at Chapman University in California.
The U.S. Federal Reserve believed it could also "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance." So, the U.S. government agreed to provide an $85 billion US emergency loan to rescue AIG, in return for a 79.9 per cent equity stake in AIG.
That was the first bailout. But AIG's troubles continued. In November, the U.S. government restructured previous loans giving the company about $150 billion US total as part of a rescue package.
"The economy and capital markets remain in turmoil, and we are taking additional steps to preserve the value of our businesses and maximize the ultimate proceeds for the benefit of all stakeholders, including taxpayers, " AIG Chief Executive Edward Liddy said in a statement.
In the latest development, the U.S. government will give AIG access to $30 billion US in new funds and will ease the terms on the aid already given out.
"We're going to be able to pay back the Federal Reserve. The new $30 billion is a stand-by line. It's not necessarily something that we think we'll have to draw on right away, " said Liddy.
What happens if it fails?
The U.S. Treasury Department believes if AIG goes down, the potential losses to the U.S. and global economy would be "extremely high" and has suggested that if in future there is no improvement, more money will have to be invested.
The consensus is that Washington really dropped the ball by allowing Lehman Brothers to fail in September 2008. The government believed investors would buy stocks in more secure institutions and the marketplace would sort itself out. But investors panicked and sold stocks of almost every company — good or not — as they pushed out of the market. Stock prices plunged, and major banks suddenly became desperate for cash, requiring governments all over the world to prop up their financial institutions.
And AIG is much bigger, much more connected company than Lehman Brothers.
Why is it controversial?
Besides the huge numbers involved and the reluctance of American governments to get into the banking business for fear of potential cries of nationalization, AIG almost went out of its way to appear irresponsible.
In October after taking millions in bailouts, AIG sent some of its executives on an $86,000 British hunting trip. When the news of the event broke, AIG apologized. Then it cancelled yet another retreat it had scheduled for later in the month.
What's in it for Canada?
Bank of Montreal is buying some of AIG's assets, picking up the Canadian life insurance business for $375 million.
BMO says the deal will give its clients access to a broader range of investment products and is expected to boost BMO's earnings within a year.
AIG Life of Canada has about 300 employees and 400,000 customers.
As well, Manulife Financial wants to purchase AIG assets in China and Japan.
How bad are things now?
For the full year 2008, AIG lost $99.3 billion US, or $37.84 US per share, compared with a profit of $6.2 billion US, or $2.39 US per share, a year earlier.
With files from the Canadian Press and the Associated Press
