Why does AIG keep losing money?

American International Group offices in New York City.

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.

About the author

Steve Henn was Marketplace’s technology and innovation reporter for the entire portfolio of Marketplace programs until December 2011.

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