Despite another rescue for AIG, problems at the state-owned insurer weigh heavily on the markets.
AT EACH lurch downwards in the financial crisis, American International Group (AIG) has played an infamous starring role. Yet again, as the Dow Jones Industrial Average closed below 6,800 on Monday March 2nd, its lowest level in almost 12 years the company deemed to be too big to fail has proven almost too big to rescue.
Once the world’s largest insurer, now AIG is in the record books for all the wrong reasons. On Monday it revealed the biggest quarterly loss of any company in American history, at $61.7 billion, down from a loss of $5.3 billion in the fourth quarter of 2007. Much of the red ink stemmed from misplaced bets in the credit-derivatives markets; what it called “market-disruption related” lost the insurer $25.9 billion, which is more than the combined loses in the fourth quarter of both Merrill Lynch and Citigroup, two of America’s biggest banking casualties.
AIG’s losses, though shockingly large, could have been worse. Its problems mainly stem from the insurance coverage it provided to banks on devilishly complex structured products. According to Creditsights, a research firm, the loss of value in these so-called super senior credit-default swaps (CDSs), as well as the company’s operating businesses, was no worse than expected.
But the results had threatened to trigger a downgrade by the credit-rating agencies, which would have required AIG to post billions of dollars more of collateral to back its CDS exposures. This provoked another of those feverish weekends at the Treasury and the Federal Reserve that were so prominent in the closing months of the Bush administration, as the authorities scrambled to find a new way out for AIG.
The upshot was the firm’s fourth bail-out since the Fed first threw it an $85 billion lifeline in September and took a 79.9% stake in the company in return. The announcement, issued on the same day as the fourth-quarter earnings, marks quite a substantial softening of the terms of that rescue package, as well as providing up to $30 billion in new capital. It removes the coupon on $40 billion of government equity injected into AIG in November and lowers the interest rate on the Fed’s credit line. While the new plan pacifies the credit-rating agencies for the moment, and provides some solace to AIG’s creditors and counterparties, it provides little reason for taxpayers to hope that much of the cost of this colossal bail-out—by far the biggest so far in the crisis—will be recouped.
In exchange for cancelling a $34.5 billion debt to the New York Fed, the government will receive preferred stakes in two Asia-based AIG subsidiaries, American International Assurance and American Life Insurance, as well as interests in life-insurance businesses in AIG’s home country. The two Asian units have performed well, but efforts to sell American International Assurance have recently drawn a blank, partly because of the severity of the global crisis and the lack of funding for buyers. The government clearly believes that rather than offloading them in a fire sale, it is better to hold them and sell them at a better price when the market improves.
That is assuming they are well managed in the interim, however; so far government ownership appears to have done little to improve the rest of the business. Hopes that official backing would enable AIG somehow to fence off the troubled financial-services division where the CDSs are housed, allowing the other businesses to run more smoothly, have come to nothing. Edward Liddy, the AIG boss parachuted in by the government, said he was surprised by how bad things had turned out at the firm and in the economy in general. He offered no forecasts for the first quarter.
AIG’s tide of red ink makes the record so far of government support for stricken financial institutions, albeit one that bridges two administrations, even more depressing. Messy rescues of Citigroup and Bank of America have failed to staunch their losses. Fannie Mae and Freddie Mac, the two giant mortgage agencies that, like AIG, are also wards of the state, have continued to bleed. Fannie last week reported a $25.2 billion fourth-quarter loss. Freddie expects to seek up to another $35 billion in public funds when it announces results shortly that are expected to be disastrous. On Monday David Moffett, its chief executive, resigned six months after the government had given him the job. It was yet another reminder that problems for big financial firms continue to get worse even when they are wrapped in the forgiving arms of the state.
0 comments:
Post a Comment