Michael Hlinka: What's next for AIG and the economy
- February 26, 2009 8:23 AM |
- By Michael Hlinka
Money Talks is a daily business column from CBC radio.
By Michael Hlinka, CBC business columnist:
This coming Monday could be a significant day in corporate history. It’s expected that American International Group, better known as AIG Insurance, will report the largest quarterly loss ever … estimates are $60 billion US. And if this happens, it’s likely that AIG will go back to the United States government and ask for more money. It received $85 billion in September, went back to the well in October, and finally got an additional $150 billion in November.
The numbers are staggering – we’re already looking at a quarter of a trillion dollars … and counting!
It’s not overly dramatic to characterize AIG as a Black Hole – and perhaps a metaphor for the mess that the United States finds itself in.
Your first instinct might be: Let it declare bankruptcy. And, believe me, if this were only about AIG’s owners, its shareholders, the U. S. Government would have let this happen a long time ago. Because the shareholders have already effectively been wiped out. Look back at the 10 years prior to 2008. AIG’s shares never traded below $45 a share. Right now, they’re in the 40 cent range.
So it’s not about the company’s owners. It is about the policyholders who rely on the company’s solvency to make their disability payments and deliver on life insurance payouts.
There’s something else complicating the situation. AIG also provided insurance to other financial institutions. In some cases, financial institutions that had bought risky real estate properties paid premiums to AIG in order to receive protection against possible price declines. Good call as it turned out. But they are only protected to the extent that AIG remains in business to honour its commitments. The fear is that if you let AIG go under, then it starts a whole domino-like bankruptcy effect that will end who knows where.
All of this means that it is virtually certain that AIG will continue to get all the money it asks for – and in one sense you can’t argue with that decision.
However, what I can argue with is the approach that the United States government is taking.
Six months ago, it had the chance to act decisively and purchase the toxic mortgages from all of the AIGs of the world. But it was better politics for the Democrats to dig their heels in than go along with President Bush’s initial bail-out package.
Fair enough – they won the election and to the victor goes the spoils … and the responsibility for dealing with the problem.
The markets are terrified by nationalization. The Obama administration has claimed that this isn’t an option. But as strange as this sounds coming from me, I’m thinking that nationalization is exactly what’s required. Because one way or the other, you can be certain that the American people will be on the hook for picking up the tab.
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