AIG was originally to receive a one-time government loan designed to provide short term financing until such time that the company could restructure and revalue its assets. However, 6 months later, we now know that insurance giant has received over $200 billion in loans and assistance. In a disclosure the company claims that it now owes the government only $37 billion, not including an additional $40 billion in US taxpayer owned shares and the $50 billion loan from the New York Federal Reserve (these amounts also fail to include TARP funds and other assistance funds estimated at around $50 billion. Disturbing however are Wall Street expectations for the insurance giant will post 4th quarter losses next week that could reach $60 billion, the largest single corporate quarterly loss in history. As a result, AIG's once powerful DOW Jones Presence has been reduced to penny stock status and the stock has plummeted by over 99%.
The reality is that AIG is not a single company, but rather a conglomerate made up of many different insurance divisions. Many of these divisions have maintained their profitability such as the company's domestic life insurance divisions. If the company had been allowed to fail, there would have been layoffs, a repercussion throughout the insurance industry and pain. However, from a structured bankruptcy, the company would have been broken up and/or sold off, resulting in leaner, meaner and in many cases profitable stand-alone companies. This is the very reason that bankruptcy laws exist. Rather, after over $200 billion in Federal funds, AIG now appears to be in negotiations to restructure its Federal debt, resulting in a "nationalization" of the company.
According to Reuters, AIG and the US Government are now negotiating a plan that will break up the company into 3-4 independent, yet government controlled divisions. Although plans are likely to change during the course of talks, Federal sources have disclosed that the company will likely be broken up by spinning off its Asian-Based Assets, Domestic Personal Lines, International Life Lines and Troubled Assets into separate entities. The move would convert the government's current Preferred Stock into shares, thus giving the Federal Government absolute control of the former giant. If the plan were too move forward, the US Government would have effective control over largest insurance company in the world, resulting in only conclusions:
- Either the companies would once again become profitable in which case the government could sell off the assets and with a little luck recoup taxpayer dollars, or
- The companies could continue to suffer enormous losses under their new bureaucratic control in which case, the Taxpayer's would once again be forced to further subsidize failure.
Technically speaking, the plan is not a "nationalization" in traditional terms. A "nationalization" typically is considered a government takeover accompanied by a stripping of shareholder equity. As a result, we are unlikely to hear any government official refer to this move as a nationalization. However, in reality, shareholder equity has been stripped through the 99% decline in stock values; in which case, everyone needs to recognize that this is a move toward nationalization. This move should worry every American, because it is laying the groundwork for the possible takeover of CitiGroup and other "too big too fail" corporations that are "failing". Bankruptcy has long been an important tool within the modified capitalist experiment that has led made this country the economic powerhouse that it is today. The idea that any company is "too large to fail" should provide a reminder to America that competition is the basis of Capitalism and that perhaps these "too big too fail" companies should be allowed to fail so that we may renew competition and responsible growth models within our economy.
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