AIG: You Now Own It.

Tuesday, September 23, 2008 | 0

By Julius Young

AIG? You now own it.

You, the taxpayer, own it to the tune of up to $850 per household.

Last night the Federal Reserve struck a deal to keep A.I.G. out of bankruptcy. The Federal Reserve will loan A.I.G. up to $85 billion, giving the United States as much as an 80% equity stake in the insurer while it raises other cash, sells assets, or otherwise orders its finances.

The terms?

A two-year loan at the Libor (London interbank rate) plus 8.5%. It will be an expensive workout for the company. The loan will be secured by AIG's assets.

Effectively, you the taxpayer are now rooting for AIG's insurance businesses to succeed.

Yesterday, as this drama played out here in New York (where I am at the moment), the National Association of Insurance Commissioners tried to calm concerns by noting that 71 U.S. based insurance companies owned by AIG are financially sound. Presumably that includes the insurance subsidiaries of AIG who write workers' comp coverage for the California market.

Quoted in a piece on workcompcentral.com, Wayne Wilson, the Executive Director of the California Insurance Guarantee Association noted that CIGA is monitoring the situation but knows of no financial downgrades to the AIG companies that write workers' comp for the California market.

Insurance commissioners across the country have been watching calls by AIG to shift assets from subsidiaries to the parent company, a move that was apparently allowed in New York.

AIG is multinational, of course. The company started in China and has a big presence in the Asian insurance market. Holdings range to aircraft leasing, Bulgarian telecommunications and Vermont ski resorts.

AIG's troubles come principally from arcane insurance ventures in insuring mortgage securities. Investment banks packaged mortgages into securities and then sold them to investors. When the mortgage crisis hit, AIG lacked sufficient collateral. Cuts in the credit rating of the AIG parent company exacerbated the problem.

And short sellers may have further driven AIG into the ground. Last night on "Mad Money," commentator Jim Cramer was ranting about how lack of oversight over short sellers by Bush appointee and Securities and Exchange Commission Chairman Christopher Cox had allowed the short sellers to reap big profits by attacking AIG and other financial firms.

The knives will be out on this one.

Meanwhile, the press and op-ed headlines are fascinating.

"Are We Running Out of Rescue Cash? by Holman Jenkins in the Wall Street Journal.
"Who Replaces AIG on the Dow? How About the Fed?"
"What Should Government Guarantee?" by Arnold Kling
"Government Stands to Make a Lot of Money Off of AIG" by F. Salmon

Further details about this deal will emerge in the next few days. Free marketeers will criticize the deal. Others will criticize it for privatizing profits and socializing losses.

Nouriel Roubini, professor at NYU's Stern School of Business, has suggested that it would be better to aid homeowners with a massive package like this rather than Wall Street firms.

And who's up next? Washington Mutual? Morgan Stanley? Ford? General Motors? United Airlines? The list goes on.

Chrysler? Hey, been there, done that.

But from a strict workers' comp standpoint, it probably means that California's workers' comp industry has dodged a big bullet for at the moment, at least. Even if AIG workers' comp subsidiaries were solvent, the meltdown of the whole company would have been a gargantuan mess to unravel.

But does each workers' comp judge now have to recuse him or herself on AIG cases? After all, as taxpayers we're all in this together.

<i>Julius Young is an applicant's attorney with Boxer & Gerson in Oakland. This column is reprinted with his permission from his blog on workers' compensation issues, http://www.workerscompzone.com</i>