Fallout: The Financial Crisis

AIG buys assets it insures

John Dimsdale Dec 24, 2008
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Fallout: The Financial Crisis

AIG buys assets it insures

John Dimsdale Dec 24, 2008
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COPY

TEXT OF STORY

Tess Vigeland: Today the insurance giant AIG announced it’s spending $16 billion worth of it’s taxpayer loan to buy up some of the assets the company insures. If you’re thinking it sounds a little odd for an insurance company to purchase the insured property instead of honoring the terms of the policy, it is. But Marketplace’s John Dimsdale tells us there is a chance the strategy might work.


John Dimsdale: AIG insured securities backed by mortgages and other assets through transactions called credit default swaps. Now that those securities have lost value, AIG is on the hook for hundreds of billions of dollars in payouts. Unable to cover its liabilities, AIG is using the money it borrowed from the government to buy the credit default swaps outright to get the policies off its books.

Brian Bethune, chief economist at ISH Global Insight says it’s like a home insurer deciding it’s cheaper to buy the house rather than pay the insurance policy.

Brian Bethune: If, for instance, you wrote an insurance contract on the house for $300,000, and if you could buy it for $250,000, then it may be better to actually buy it at the reduced the price and then write off the $300,000 insurance contract.

The problem is, why would the homeowner opt for selling cheap, instead of cashing in on the full insurance policy? Bethune says many credit default swap owners are willing to take that loss.

Bethune: Maybe realistically some of these asset holders are saying ‘I’m not going to realize the full value of this insurance anyway. So I may as well take what I can get now rather than deal with the uncertainty of not knowing what I’m going to get in the future’.

And for this scheme to work from a taxpayer perspective, the securities AIG is buying will have to eventually appreciate in value to give the company enough money to pay back its government loans.

In Washington I’m John Dimsdale for Marketplace.

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