Perhaps as early as Monday, March 2nd, 2009, the American International Group (AIG) is going to report the largest quarterly loss in the history of finance. Rumors suggest it will be around $60 billion, which will affirm AIG’s sorry status as the most fatally crippled of all the nation’s wounded financial institutions. The recent quarterly losses suffered by Merrill Lynch and Citigroup — “merely” $15.4 billion and $8.3 billion, respectively — do not even compare.
So far to keep AIG afloat the United States government has thrown $150 billion at it, in loans, investments and equity injections. Now the government will have to announce yet another bailout plan in the many billions. All to save a company whose stock is now selling at about $0.50 a share.
Unfortunately for America taxpayers the world’s financial system is so intertwined with the gross mistakes made in evaluating risk made by AIG’s management team that allowing AIG to completely fail would be a disaster for the US, European, and world financial system.
Even though AIG was running what was basically a scam and gaming the system the consequences of failure would be so severe that the US government will probably once again pony up the funds to keep it going as a zombie institution.
I doubt that over the long run AIG can be saved. In time the horrors of an AIG failure will probably have to be dealt with. I expect that the house of cards will eventually come tumbling down no matter how hard the government tries to repair the structure’s damage. When a house of cards is constructed on a foundation of quicksand the outcome is fairly predictable.
How long can the US government keep throwing billions at AIG only to see the billions melt away? My guess is probably not for too much longer. The scale of AIG’s distress is so humongous that saving AIG may jeopardize the very creditworthiness of the United States government. US creditworthiness is already being questioned by more honest financial analysts. Additional billions and trillions in bailout money for AIG, Citigroup, Bank of America, GM, and who knows who or what else is not very reassuring. The AAA credit rating of the US is already in jeopardy.
AIG is the eight hundred pound gorilla in the room that could insure that the long crisis lasts for a very, very long time and that ox carts become our new form of not so rapid transit. The US government and European governments must be scared silly by the AIG monster. Should downgrades in its credit rating occur, as is likely warranted by it’s impossible financial condition, the billions in required cash infusions to keep it and the web of financial institutions afloat that have exposure to AIG could turn into trillions.
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Yet another well written, interesting, and highly informative post, travelwell. I don’t claim to be an economical or financial expert, but you don’t have to be to see that throwing good money after bad isn’t wise. I’m concerned that the policy of the US to just crank up the printing press when the government needs more billions is going to devalue our currency to the worth of nothing more than the paper used to print it. That was the catyist that lead Hitler to power. Money was so worthless pre-WWII that purchases were weighted, with no consideration of the denomination printed on it. Hitler offered a way for Germany to again be powerful and properous, but I sure don’t want to see the US follow those same footsteps. Not that I think we will, only trying to emphasis the point that even money can become worthless.
I read a couple of days ago that Citibank recently fell for a scam in which they were taken for $37 million. Wonder if the government will just replace it with bail out money? lol Chicken feed compaired to the figures we’ve been seeing. But it would be obvious to the new First Dog that what our country, and the world, needs in these times is fiscal sanity. Seems a tough commodity to find.
Hi Eugene,
Thanks for your take on the AIG crisis. I believe that the American people, like yourself, are more in step with reality than the Clinton, Bush, and Obama economic gurus. For the most part the same tired old guys that got us into this mess say that they know how to get us out. I have my doubts.
Most sane people know that it’s only sensible to think that bringing back the very dead and buried is a fruitless task. However, the Obama team of “experts” seems determined to do just that with AIG and others. To be fair the outright failure of AIG would be a disaster of the first dimension. However, AIG will probably never be a viable company again, ever, no matter how many bailouts it receives, so tossing many billions of additional Dollars at it now is IMHO a lost cause. One estimate floating around is that it will take $100 billion of new funds in the short term to keep AIG a zombie institution. That would bring the taxpayer bill up to $250 billion injected into a company trading for around $0.50 a share.
The Washington D.C. government people have to be so scared they can’t think straight. Disaster is surely on the way.
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