Should AIG Get More Federal Bailout Bucks?

Here we are, holding our breath again, waiting to learn whether American International Group can stay afloat amid rumors of a record loss in the fourth quarter, while wondering if Uncle Sam will once again come to the rescue. At least one insurer organization has raised the bigger question of whether the bailout is giving AIG an unfair advantage in the insurance market, and what impact that will have on healthier competitors in the long term.

The point may be moot, as it's unlikely Treasury and the Federal Reserve will just stand by and watch the country's biggest insurance organization collapse, especially after we've already poured some $150 billion of taxpayer funds into AIG to keep it in business.

While I supported the bailout when it was first put into effect, I worried about this becoming a bottomless pit for taxpayers. In for a penny, in for unlimited billions, right?

Now it looks like our worst nightmares are becoming reality. Who knows how much AIG will eventually need to remain viable while trying to sell enough assets to pay off its government loans during the worst credit crunch and economic downturn since The Great Depression?

Enough, cries the Property Casualty Insurers Association of America! As reported by our own Dave Postal, PCI says the federal government should reconsider providing additional bailout money to AIG, arguing that doing so creates an unfair advantage for the company and penalizes its healthier competitors.

(For the complete story, click here.)

Providing additional subsidized taxpayer loans to insurers who are also thrift holding companies could create unintended negative effects on consumers and the marketplace, warned David Sampson, president and CEO of PCI. He was reacting to media reports that AIG will report a massive loss–perhaps as high as $60 billion–early next week, and that the troubled company is in talks with the feds to secure more financing.

Without another lifeline, we're told, AIG's latest loss might result in downgrades in its insurance and credit ratings, requiring AIG to come up with additional collateral it simply does not have. That's where Uncle Sam comes in–again!

If Washington says enough is enough, that would probably force AIG into bankruptcy–a fate the government was trying desperately to avoid in the first place back in the fall when all hell broke loose in the financial markets.

Mr. Sampson, characterizing AIG as an insurer that became a bank or thrift holding company, complained that AIG, as the poster child for the bailout generation, gets cheap federal loans. He suggested this subsidized capital could be diverted to their insurance affiliates, thus allowing AIG to grab more market share in the short term at pricing levels that are unsustainable in the long term.

Such actions potentially not only undermine healthy competitors but also spread additional risk to bank or thrift subsidiaries receiving the federal money, Mr. Sampson argued. This destabilization of the marketplace makes it increasingly impossible for the government to unwind the unsustainable market conditions it helped create.”

Mr. Sampson concludes that the unfortunate results for consumers and taxpayers are more risk, higher costs, less competition and an increasing reliance on government intervention and resources.

Eventually, he predicted, even highly profitable and fiscally sound insurers would have a duty to their shareholders to line up for federal largesse to avoid being boxed into a competitive disadvantage, while taking pains to point out that the vast majority of [property-casualty] insurers, who are healthy and sound, do not currently need federal investment in their businesses.

While I still cannot get my head around how we got into this mess in the first place–see my Feb. 13 blog about the failure of enterprise risk management at AIG–I definitely cannot imagine how all this is going to end. Can you?

How in the name of fiscal sanity can we (the taxpayers) turn our collective backs on AIG now, after sinking so much capital into the struggling firm? And what would be the consequences if AIG is forced into bankruptcy–what would happen to all the public money we've already spent?

And what would the impact be on the already fragile stock market? How about on the national and global economies? Would an AIG bankruptcy prompt another meltdown and destroy what's left of our nest eggs, and remove what little stability the U.S. economy has left, putting millions more out of work? I shudder to think about the potential consequences!

Yet how can we in good conscience keep investing good money after bad on a company that got itself into this mess through reckless trading of worthless securities? Where is the end game here? Is the plan to restore AIG viable? That's the $150 billion (and counting) question!

Frankly, I don't think we have a choice at this point. We've made our bed, and now we have to lie in it, no matter how much it costs. As President Barack Obama is so fond of saying when it comes to the economic stimulus package, the cost of doing nothing would likely be far greater than the cost of doing what we're doing, while hoping for the best.

What do you folks think?