by John Darer CLU ChFC MSSC CeFT RSP CLTC
It's September 17, 2008 and the financial panic over AIG appears to be over
According to CNBC, BBC and other published sources. the Fed will lend AIG $85B in exhange for a 79.9% interest in the company. As I understand it taxpayer money is secured by the assets of the company and its subsidiaries. The board of the Federal Reserve made its decision about AIG "with the full support of the Treasury Department", it said in a statement, adding that the secured loan included conditions designed to protect "the interests of the US government and taxpayers". The thing is if the Fed stepped in Friday, before the credit downgrades the loan would be much smaller.
The BBC reports that "the AIG plan calls for the government to seize up to 80% of the company and remove its management, in a similar fashion to the way it took control of mortgage giants Fannie Mae and Freddie Mac which were crippled by the US housing crisis."
Commentary
- The core insurance business of AIG was not the problem that created the crisis.
- The fact that it took the fear mongering financial media over 24 hours to let consumers know that the core insurance operations of AIG were safe has not gone unnoticed. The irresponsible reporting that "the company was toast" led to needless panic among consumers. Reporters should be educating consumers not effectively committing what was referred to on CNBC as "financial homicide". Ridiculous!
- After the announcement of the bail out, financial columnist Suze Orman reiterated her support for the bali out and said that in a "what if" scenario people with AIG insurance policies would have "been just fine" in the event of the company going belly up and, that claims and other obligations would have been paid. Orman erred however, in implying that state guarantee funds would guarantee the full face amount of a life insurance policy in the event the company went belly up. This is simply not the case in every situation. The National Organization of Life and Health insurance Guaranty Associations website contains relevant information on the topic for consumers.
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Insurance is a highly regulated industry. All US insurers are regulated by state law and are required to maintain enough capital and surplus to satisfy the obligations to their policyholders. The September 2008 issue of Best's Reviews states that US insurers will pay $1.5B for states to regulate them in 2009! In addition the type and quantity of investments that insurers may invest in is limited by state law. With respect to AIG, its subsidiaries that write structured settlement annuities are individually responsible for the liabilities associated with the policies they write. Each subsidiary insurer is individually regulated by the state of its domicile( and in all all states admitted), for compliance and financial solvency tests independent of its parent or any affiliates. Major transactions regarding insurance companies are generally required to be approved by the resposible state regulator.
- The general accounts of the structured settlement annuity issuing companies of AIG/American General are not obligated to support any other AIG businesses.
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