Posts Tagged ‘Insurance’

Why we can not allow AIG to fail

Sunday, March 8th, 2009

Many Americans are tired of giving money to AIG. It does not seem to be making things better. However, if the government were to allow AIG to collapse, the rest of the economy would go with it.

AIG is a different kind of animal when compared to the Bear Sterns and Lehman Brothers. Those companies were allowed to collapse because they were more or less self contained. As an insurer, AIG has its hands in way too many cookie jars. Many large and somewhat stable companies have assets that are backed by AIG, if you remove AIG from the equation, these stable companies are now are a huge risk to default themselves. There credit ratings will suffer and you would see another Bear and Lehman like spiral.

The government will keep pumping in capital until the nasty spiderweb that AIG has created can be untangled and bankruptcy can occur gracefully. Until then, get used to the abyss of soul sucking sorrow that is AIG.

It seems that AIG has been a major underwriter of Mortgage Insurance. Of course, in keeping with the times, they were fraudulent about the underwriting of these policys.

AIG categorized its instruments as Credit Swap Defaults, rather than the Mortage Insurance that it really was, because they did not have the liquid assets to qualify these instruments as Insurance.

Say bye to AIG and there would be a domino effect throughout the international banking industry, as many institutions far and wide hold what they think, and are counting on as positive assets, would be in fact worthless.

Here’s the problem: if you insure against loss in a case where a catastrophe can hit almost all your insurance customers are once, you’re screwed.

Was AIG dumb? Yes. Did they understand the risks they were taking? No.

But now look at who bought the insurance. Banks that were trying to hedge their exposures. Did they understand the counterparty risk they were taking by using AIG? No… but AIG was rated AAA so they thought there was no risk.

How much money has the Government handed over to AIG? And how many installments have already been made? I lost count, but one cannot help but notice this repetitive propping up of AIG at any cost. I think I understand why.