About AIG

I wrote the prior two posts appearing today before the close of the market yesterday. Thus, the AIG loan package from the Federal government was not yet finalized.

How could I not write a few words about the AIG debacle today?

At first, it seemed to me a reasonable solution that AIG should be induced to file Chapter 11, with the Treasury or Fed as trustee. In short order, three companies would be created, one being the collection of pure insurance firms which are registered in various US states and foreign countries, the second being those units which functioned as mutual fund managers, and the third being 'all other,' including proprietary risk-taking businesses of AIG.

In discussing this last night with a friend who works at Fitch, we agreed that such a solution would make sense and be reasonably pragmatic.

Thus, my initial reaction to the loan extended to Willumstad's AIG was that it is a needless and further corruption of the doctrine of moral hazard. One look at the nearby Yahoo-sourced chart of AIG's equity price for the past twelve months clearly illustrates that AIG's management had fair warning that investors were not going to be receptive to providing new capital at reasonable prices.

From January of this year, the company's share price decline began accelerating, hitting a sharper decline after May. But that was over three months ago.

Like Lehman, one may fairly argue that Martin Sullivan, Willumstad's predecessor, had plenty of time to see danger ahead and do something about it.

As I said to my business partner, and the friend with whom I spoke last night, Hank Greenberg was to AIG what Jack Welch was to GE. Both presided over corporate structures and performance in ways that effectively sprinkled pixie dust over analysts and investors. As soon as each was gone, both of the latter groups suddenly declared the companies 'complex,' 'difficult to understand,' and the value of both firms plunged.

One can question, in both cases, but especially AIG, why anyone let such a complex financial grabbag of businesses be so highly rated for so long.

In that sense, I disagree with the Federal loan arrangement, which seems to reward building impenetrable financial corporation structures, then waiting too long to shore up capital.

On the other hand, panic among consumers holding life and other insurance policies from AIG, as well as investors in its mutual funds, would create needless and unwarranted upheaval.

Perhaps the warrants that the US government holds, which have value, should AIG not effectively dismantle itself, creating sufficient value to pay off the $85B loan, is sufficient price to dissuade other financial service entities from taking prudent action before needing to fall on the mercy of the US taxpayer.

Perhaps not.

If the loan truly only buys breathing room for the dismantling of AIG into an insurance firm, an asset manager, and the rest of the mess which comprised it, and the values of the good parts repay the loan, with the US government as senior creditor, then it might make sense.

I just question whether the larger signal that CEOs can continue blithely ignoring capital inadequacy and clear weakness, knowing that the more complex, entangled and diversified the firm is, the more likely a regulator will ultimately take it over, is a net benefit.

I don't think it is.