Why AIG can’t fail

last updated 8 January 2015

What happened

Insurance giant AIG and the U.S. government agreed to a fourth bailout for AIG, which is reporting a $62 billion loss Monday, the largest quarterly loss in history. The new deal involves another $30 billion in federal dollars—the U.S. already owns almost 80 percent of AIG, after putting up $150 billion over five months. The government will get stakes in two profitable AIG life insurance subsidiaries. (The New York Times)

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The “astounding amount” of taxpayer dollars needed to keep AIG from the consequences of its own malfeasance “should make your blood boil,” said Joe Nocera in The New York Times. But we’re not just keeping AIG from going bust—we’re also rescuing the companies whose toxic assets AIG insured. Essentially, AIG has the entire Western banking system “by the throat.”

Then the entire Western banking system needs to “share the pain” with us, said Lauren Silva Laughlin and Richard Beales in BreakingViews.com. AIG was supposed to reimburse U.S. taxpayers by selling off units, but it hasn’t been able to, or has been forced to sell at bargain prices, because nobody has money to buy, and who’s going to offer “top dollar” when the seller has to sell?

Clearly, “putting more taxpayer money at risk is unlikely to be palatable,” said Lilla Zuill and Kristina Cooke in Reuters, but the U.S. had to act, and fast. Moody’s and Standard & Poor’s were set to downgrade AIG’s debt to junk status Monday, if the government hadn’t stepped in. If AIG’s credit rating fell, the resulting chain reaction would be “too big a shock to already fragile global markets.”