Tuesday, March 2, 2010

A Bleak Report from AIG

Insurance giant AIG, whose collapse in 2008 nearly broke the world’s banking system, reported a $9 billion quarterly loss on Friday.

The really troubling thing about this loss is that it occurred in a quarter when the stock market was rising. During the previous two quarters, stock market gains had been sufficient for AIG’s insurance divisions to report a profit. But that was during the most rapid increase in the history of the stock market — a stock market bubble. If it takes a stock market bubble for a company to break even, it is fair to say that the company is losing money in its operations. Worse, this has probably been the case for years at AIG’s insurance companies, and was likely the underlying stress that led AIG executives to undertake their trillion-dollar gambles in the derivatives market.

And if this is the case, then the ongoing effort to spin off or otherwise save AIG’s insurance divisions is a fool’s errand. They cannot be spun off if they cannot stand without subsidies. They cannot ultimately survive in any form while continuing to lose billions of dollars year after year.

This is especially the case when you look at what will be left of AIG after the sale of AIA, AIG’s Asian life insurance operation. AIA is as close to the heart of AIG as you can get, and the only large operating company in AIG that was possibly still breaking even. Even with AIA, the best chance to keep AIG going was the Wall Street equivalent of casino gambling; without AIA, there is no other course of action.

AIG’s financial statements contained the warning that the company might run out of money and need to seek additional outside funding, presumably again from the Treasury. Even with the $25 billion from the AIA sale, that day may come soon — $25 billion might sound like a lot of money, and it is, but it is not enough for AIG to withstand the next downturn in the stock market. AIG says its entanglement with the world’s large banks has been reduced by an order of magnitude from its peak less than two years ago, and even at its peak, it never posed a systemic risk to the broader economy, though perhaps Goldman Sachs and General Motors were at risk. If AIG does come calling for more money as Wall Street’s fortunes sag in the coming weeks, perhaps the Treasury can be persuaded to allow the company to wind up its affairs with the dignity of a proper liquidation in bankruptcy court.