The Monster Under Our Bed: AIG's Untold Story

Monster? What monster?

Monster? What monster?

Six months into the bailout, American International Group asks in a PowerPoint presentation pitched to anxious regulators “AIG: Is the Risk Systemic?” It’s a real nail-biter. In fact, it’s a new literary genre, the mystery-horror slideshow. It may look like any other mind-numbing Wall Street deck — dense, disorganized, and repetitive — but like AIG itself, it’s both scarier and more bloated.

The central message: AIG is big, really big, really, really, really big and if anything were to happen to AIG, any of its affiliates, subsidiaries or distant cousins, taxpayers around the world would suffer. But don’t ask too many specific questions. AIG is the monster under your bed and as we speak it is plotting to swallow you and your dollars before you can ask even one question. Don’t try running down the hall to Mom and Dad. He’s already taken care of them.

So grab your blankie, America, and get ready for a blood-curdling tale. There’s a yellow-eyed monster under your bed. And it wants the mother of all bonuses.

Quickly flip through the slides, and try to find the answer to the central question — did US taxpayers really need to bail out AIG? Did it pose systemic risk?  In 21 blood-stained slides, you will learn in 17 different ways that the risk is “significant”: For example, in Europe last September, there were “significant  ‘runs on the bank’ in various Asian and European countries.”  I can’t help but wonder: How many insignificant runs on the bank were there and how is the global financial system surviving? Did anyone rescue those poor banks? Did we lose a country or a system (other than Iceland), but never get notification?  Interest rates don’t suggest banks aren’t lending to one another, a big problem back in the fall of 2008. In February the one-month Libor, a key indicator of banks’ willingness to lend, averaged 0.4628%, down from 2.927% in September 2008. Other credit market indicators do not suggest that anyone expects imminent runs on the bank; or if there had been one, the problem is under control.  But we should take note: AIG Consumer Finance Group operates in Latin America, Europe, and Asia.

Slide after slide describes lots o’ “impact”.  The impact may be  “sweeping” for insurers or “cascading”  on the economy at large. Sometimes, it is simply an impact, like an airplane dropping from the air.

At regular intervals, the AIG horror show implies that the world as we have come to know it, even in our current reduced state, would cease to be:

A failure of AIG would have a devastating impact on the U.S. and global economy.
The economic effects may include:
• Potential unemployment for a large portion of the 116,000 employees, including 50,000 employees in all 50 states and the District of Columbia (generating annual U.S. salaries totaling $3.5 billion)
• Adverse impact on AIG’s 74 million customers worldwide, including 30 million U.S. customers in its general insurance, life insurance and retirement services, and financial services businesses

AIG probably has the largest concentration of actuaries in the world, many of them who have manipulated numbers to create profits for AIG’s numerous and sprawling insurance units. Actuaries, you may recall, were the people in your college statistics class who annoyed (or tutored) the psych majors. Why weren’t they asked to prepare scenarios — best, likely, and worst — for the regulators? They always have calculators in their pockets. The scenarios sprinkled throughout this PowerPoint presentation are clearly designed to terrify — which leads me to wonder: When did level-headed insurance geeks, probability whizzes,  turn into monstrous propagandists? Clearly, the goal of this document is designed to scare every single dollar out of the government that it possibly can. A serious business document, it certainly is not.

This week the one year demise of Bear Stearns, a firm initially deemed as too interconnected to fail. But one year later, we really don’t know if that was true. Lehman flamed out in a spectacular bankruptcy the very same weekend that Uncle Sam rushed to save AIG. Yet six months later, we are still in the dark: What happened to the $600 billion in debt plus the $400 to $500 billion in financial instruments tied to Lehman? Derivatives defenders note that the contracts were settled for a net $6 billion; the number is so small because many investors had offsetting trades that netted out to zero. But not so fast — not everyone participated in that round of settlements; many counterparties have holes in their pockets. The flow of money remains a mystery.

AIG launches its mystery-horror tale by reminding us of the perils of interconnectedness, the term the Federal Reserve chairman relied on in cobbling together the Bear Stearns deal. In the heat of the moment, it’s hard to know if it was the right assessment. But somebody, somewhere in government should be analyzing what went right and what isn’t so right in these deals. AIG  doesn’t analyze either; it terrifies by noting that “interdependencies” in the system that “could potentially bankrupt or bring down the entire system or market if one player is eliminated, or a cluster of failures occurs at once.”

It’s time these financial whizzes showed more rigor in analyzing the risks. AIG shouldn’t be putting out sales propaganda. (AIG didn’t return a call to discuss the slideshow.) Of course, many will note that they were wrong about how they analyzed risk the past few years. That just simply means they should be getting in the people who saw what was coming and made money from it. Those people aren’t very hard to find. (Of course, they could get it wrong; but that’s no excuse for not trying.)

Before saying good night, let’s take a look at one last slide, No. 3, “Risk Assessment Summary”. It pretends to solve the mystery at hand.  It states: “In the fall of 2008, the Federal Reserve and Department of the Treasury determined that the systemic risk of a failure of AIG was so great that they should provide a support program by injecting liquidity and equity capital into AIG.”  Translation: We take no responsibility for the bailout. The Fed and Treasury decided that they needed your money to prevent a systemic meltdown. So, never mind. You don’t need this presentation. Just stick it under your bed.


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