Finally, thanks to Calculated Risk, we have the AIG document that put the fear of the apocalypse into Washington. It is worth reading the whole thing, but here are a few selections:
[P]ermitting AIG to fail would be even more serious today than in September, especially in view of the support of the U.S. government. Public confidence in financial institutions is at a nadir and it is questionable whether the economy could tolerate another shock to the system that a failure of AIG would produce.
A VALIC/AIG Annuity failure would be one of the largest failures in the history of life insurance, putting applicable retirement savings significantly at risk and causing a loss of confidence in the private penion system in the U.S.
Failure would produce and immediate “run on the bank,” which would likely lead to state seizures of local operations, causing a lock-up in customers’ retirement accounts and payment of monthly/quarterly annuity checks.
Failure to provide a wrap on $38 billion of stable value funds could result in millions of lost value on money market positions potentially “breaking the buck”
Credit protection on $63 billion in CDOs/CLOs may be eliminated
In each of these points, as in the rest of the document, the key issue that is not mentioned is that AIG is an extraordinarily inefficient vehicle to provide the funds described. We would be better off supporting insurance and money market reserve funds directly – and letting European governments deal with capital shortfalls in their banks – than spraying money through AIG to beneficiaries who may or may not be needy.
AIG’s arguments are completely time-independent. If you believe the document, AIG will always be too big to fail, since its managers have no incentive to shrink it, as mentioned here. I would turn it around; if AIG’s closure will always be a nightmare, why not get it over with today, when we still have the ability to borrow for virtually nothing, as opposed to a year into a recession after we have flushed hundreds of billions?
Beyond the arguments, though, is the sheer gall of the AIG folks. Here is the lead argument of their summary slide:
Insurance is the oxygen of the free enterprise system. Without the promise of protection against life’s adversities, the fundamentals of capitalism are undermined.
You jerks, you are the ones who undermined the promise of protection when you decided to stake several times your enterprise value in completely unrelated businesses. You are the ones who destroyed a fantastic franchise and put us all on the brink. Capitalism would have long since liquidated your business; it is only through the grace of the socialist aspects of our culture that taxpayers who had no input in your decisions and no benefit from your actions are being asked to bail you out of your mess.
The more I see these guys in action, the more I believe they have simply decided to hold themselves hostage. Check out 2:45 into the clip to see their guiding logic (includes some NSFW language):
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