A Brief History of AIG
American International Group, Inc. was founded in 1919 in Shanghai, China by Cornelius Vander Starr. Mr. Starr was the first westerner in Shanghai to sell insurance to the Chinese. The firm was successful and expanded it’s operations to other countries in Europe, Latin America, and the Middle East. In 1962 AIG gave control of the unsuccessful US operations to Maurice Greenberg who changed the company’s focus from personal insurance to high margin corporate coverage.
A Shady Past
By 2005 AIG was the subject of a number of fraud investigations by the US Justice Department, the Securities and Exchange Commission, and the New York Attorney General’s office. The investigations resulted in the ousting of Mr. Greenberg, a $1.6 billion dollar fine, and several executives faced criminal charges. After several CEO’s were forced to step down Edward M. Liddy became CEO on September 17, 2008.
AIG Losses
AIG share prices fell 95% from a high of $70.13 to $1.25 and the company reported $13.2 billion in losses in the first 6 months of 2008. It was found that AIG had overvalued their Alt-a and subprime mortgage backed securities. In mid September it was announced that the Federal Reserve Bank of New York would bailout AIG to the tune of $85 billion dollars. In return the US government owns 80% of AIG’s stock.
Opposition to the Bailout
Many in Washington expressed concerns about bailing out a firm with such a troubled history. One of the sternest critics of the AIG bailout is Senator Jim Bunning of Kentucky. Bunning stated “Once again the Fed has put the taxpayers on the hook for billions of dollars to bail out an institution that put greed ahead of responsibility and used their good name to take risky bets that did not pay off,” Bunning said in a statement. “The only difference between what the Fed did and what Hugo Chavez is doing in Venezuela is Chavez doesn’t put taxpayer dollars at risk. … He just takes” the companies.”
The Kentucky Republican who is a member of the Senate Banking, Housing and Urban Affairs Committee is sponsoring a bill that would forbid the Federal Reserve from making funds available at a discount rate to private individuals, partnerships and corporations. Two days after Bunning proposed his bill Fed Chairman Bernanke and Treasury Secretary Paulson announced the takeover of AIG.
The Bailout Proceeds
Officials who supported the bailout justified their position by claiming that the failure of AIG would wreak havoc in world financial markets. The American taxpayer is being asked to finance the rescue of a company with a history of fraud and improper business decisions. Nobel Prize winning economist put it succinctly when he said “They called it insurance, but they were gambling. In a market economy, there has to be a sense of accountability. You can’t come running to the government every time you have a problem.” Because of the irresponsibility of Wall Street executives world markets have been thrown into turmoil including interbank Forex markets. Banks are hoarding gold and dollars and interbank forex lending has all but ceased.
The Role of Government in the Marketplace, the Debate
A political debate over the role of government is raging about the role of government intervention in the marketplace. On one side are the free marketers who believe that any government intervention is improper and on the other side there are those who believe that the situation is grave enough to justify government intervention. Both sides seem willing to compromise for now but the bottom line is that the American taxpayer will foot the bill for any intervention. There is no doubt that this financial crisis affecting such businesses as AIG will have a noticeable affect on the interbankforex market.
