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Why does AIG keep losing money?
American International Group offices in New York City.
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TEXT OF STORY
KAI RYSSDAL: Another day, another $30 billion down the financial sink-hole otherwise known as American International Group. The running tab for the government's bailout of AIG is now more than $180 billion.
The Treasury Department and the White House each said today more may be necessary. And that's not entirely out of the question. Alongside the bailout news came word today that the company lost $61.7 billion last quarter.
We sent Marketplace's Steve Henn to find out why AIG keeps on losing so much money.
STEVE HENN: AIG insures lots of stuff -- not just life, property and casualty. Remember those credit default swaps?
Gradient Analytics' Donn Vickery says those swaps are basically insurance guaranteeing banks' investments. But AIG . . .
DONN VICKERY: . . . Did not appear to understand how to value them. And worse yet, they didn't hedge any of their risk.
Vickery says AIG was an insurance company selling insurance without really understanding the risks.
VICKERY: Right, exactly.
And it's not just mortgage-backed investments that AIG's wrapped up in. The company has lots of business lines.
PAUL KEDROSKY: One of them was selling insurance to European banks.
Paul Kedrosky at the Kaufman Foundation says European Banking rules allow banks to hold less cash and increase their leverage.
KEDROSKY: If you went out and got insurance from a provider like AIG.
Today AIG insures more than $230 billion in European bank investments. Many may be bad. And if AIG defaults on these policies, some big European banks could fail.
Analyst Rob Haines at CreditSights says when the U.S. Treasury bails out AIG, it's also propping up European banks.
Rob Hainse: That's true, and it doesn't sound very palatable to a lot of U.S. taxpayers.
The total cost to taxpayers could rise to a quarter of a trillion dollars, but Haines says letting AIG take down Europe's biggest banks would be even pricier.
In Washington, I'm Steve Henn for Marketplace.
good summary but lets not get lost and think the product, insurance, is the problem. its what they were INSURING that was (is) the problem.
while insurance companies have reserve requirements for property and casualty coverages, these guys were selling "insurance", basically come bets, if you accept the craps analogy, on smoke and mirror securities with NO RESERVE requirements. this is the problem!
if you did three simple things 1) make anyone selling these instruments in the future (still useful!) but require some reasonable reserves an 2) put "counter" on all these securities so they could only be resold ONCE or TWICE and 3) return the ratio back to 12:1 from 35:1 as was so wrongly allowed in the early days of the w disaster.
yes i work in insurance and lexington, part of aig, is a direct competitor. they are good at what they do and more importantly, they take on exposures no one else would want and do it fairly cheaply.
say you want $50M of property coverage on a chemical plant that just suffered a $30M fire. call lex. they'll talk to you while most everyone else will laugh at you or send you into the e&s market where the real sharks are.
and thats why the govt plan to form a holding company and preserve that very profitable entity was a GREAT move. the economy really needs a viable lexington.
So, let's cut to the chase: is it the fault of the insurance company, to take money to insure what they do not understand, or is it the fault of the insured, that they did not explain fully what was being insured?
I would think figuring out culpability would be very important...if of course, the bailers-out were using THEIR money, not ours'
