Following the AIG money

U.S. taxpayers have pumped more than $180 billion in bailout assistance to the American International Group (AIG) because, as we all know, the company was too big to fail.

It’s not surprising that the GAO reached a similar conclusion  in a comprehensive report released last month on why the bailout occurred.  The GAO also looked at where the money actually went and whether or not it actually helped the company.  After slogging through the GAO report, I’ve come to the conclusion that the GAO has concluded that:

• The company was indeed too big to fail.
• The money was provided to AIG in the form of loans and equity investments, contingent on the company’s winding down its AIG Financial Products Corporation and divesting itself of other businesses. 
• It’s too early to tell whether all of the bailout money will enable AIG to survive in the long term.

Not real comforting news to taxpayers.  But the report doesn’t really seem to take a position on a key criticism of the bailout, which was that the government shouldn’t have paid AIG to clean up the credit default swap mess.  Rather, it could have infused funds directly to the banks that bought the derivitives, letting them take haircuts.

Another question I’m now left with about AIG has to do with something that perhaps inadvertently stood out in the GAO report.   On pages 6 and 7 of the report, the company’s organizational chart is reproduced (it takes 2 pages to display the chart).   As the GAO notes, AIG comprises at least 223 companies and has operations in over 130 countries and jurisdictions worldwide.  In addition to its financial products division, the AIG organization includes the largest domestic life insurer and second largest domestic property and casualty insurance company in the U.S.

Couldn’t the Federal Reserve Bank of New York and the U.S. Treasury Department have ordered AIG to cut say 100 or 150 of those 223 divisions loose before pumping in all of that bailout money?

According to the organizational chart, AIG also owns the AIG Bulgaria Insurance Company, the American Fuji Fire and Marine Insurance Company, the New Hampshire Insurance Company, something called American General Finance Services of Alabama, the American General Consumer Discount Company,  and much much more.   AIG is a company that clearly spent years acquiring other companies all over the world until, yes, it finally achieved its goal — it became too big to fail.

Or did it?  Had the company begun shedding the AIG Bulgaria Insurance Company, the American General Consumer Discount Company and some of those other firms early on,  mightn’t it no longer have been too big to fail when the federal government began considering the bailouts? 

According to the GAO report, that divestment is only happening now.  The GAO stated that the Federal Reserve expects the disposition of assets to be the principal way by which AIG will repay the government loans and allow the Treasury to recoup equity investments.  The report added that AIG’s plan, according to its former chief executive officer, was to sell off about 65 percent of the company.  However, the current chief executive was reportedly re-evaluating that plan.

Meanwhile, until all of that debt is repaid and the equity interests repurchased or sold, U.S. taxpayers remain exposed to those credit and investment risks, according to the GAO.   The watchdog agency notes that “the sustainability of any positive trends of AIG’s operations and repayment efforts is not yet clear.” 
       

Compared to the scrutiny that Congress is now giving to efforts to finance the administration’s health care reform proposals, it seems the bailout of companies like AIG a few months back went through with few questions asked.