The (Second to) Last Word on the AIG Bailout

Thursday, June 21, 2012 | 0

We taxpayers agreed to pony up $182.5 billion to bail out American International Group after the credit derivative debacle (well, mostly we taxpayers). There were two criticisms of the deal; first that the government should allow the market to determine winners and losers, and second that we'd lose our money. First, the second criticism.

As of yesterday, the Federal Reserve got all its money back plus more. AIG (now doing business as Chartis) announced it has repaid all the Fed money it borrowed (it did not need $21 of the $182.5 billion) and dramatically reduced the amount it owes the US Treasury.

To date, AIG has paid back about $152 billion.

While most of these dollars came from the sale of assets - insurance companies, leasing companies, and other subsidiaries of AIG, this would not have happened if not for significant improvements in the company's ongoing operations.

That is a credit to the Chartis employees who suffered - and I do mean suffered - through the brutal conditions after AIG's credit derivative investment group damn near killed the whole company, and a good chunk of the world economy along with it. Whether it was navigating the crowds of protestors outside company buildings, avoiding neighbors at cocktail parties and cookouts, testifying before regulators and Congress, or talking to customers, brokers and prospects, the late summer and fall of 2008 were just awful.

Chartis still has significant issues (excess work comp book is a big one), but CEO Benmosche has the company back on the right track. And thanks to those who stayed and fixed Chartis, the Fed has actually made a profit on that bailout - a profit of at least $3 billion and probably twice that.

In regard to the first complaint about the bailout, there's a legitimate argument to be made that governments should not bail out companies that fail. In the case of AIG, I believe that's not the case, for two reasons.

First, inadequate regulations undoubtedly played a part in the credit derivative issue. Thus, government was somewhat responsible for the disaster, and we - the people - are the government. We "allowed" AIG to made those now-obviously-incredibly-stupid investments (isn't hindsight great?), so, because the problems inherent in a failure of AIG were so monumental, we have to share the responsibility for fixing the problem.

Second, AIG had its fingers in so many aspects of global finance that a failure would have been more than a disaster - it would have cratered the world economy and devastated many individuals, companies, and families. As I noted back in 2009, "AIG provides the underpinning for many pension funds and retirement plans; its financial instruments guarantee the returns for pensioners. It backs up the investment of many banks. It owns many of the airlines' airplanes, planes that might be repossessed if AIG goes under. AIG insures many Fortune 500 companies, and is among the largest writers of workers comp in the nation. It is a large individual auto insurer as well."

Thanks to WorkCompCentral for the head's up.

Joe Paduda is owner of Health Strategy Associates, a Connecticut consulting firm, and co-owner of CompPharma, a consortium of pharmacy benefit managers. This column was reprinted with his permission from his Managed Care Matters blog.