News of AIG’s troubles, the subsequent bailout funds given to the insurance company, and its effect on the industry have been making headlines for months. But where are we now, and what can you do in this climate?
To find out, we spoke with William Klepper, adjunct professor for California Lutheran University in Thousand Oaks, CA. With more than 24 years in the financial industry, Klepper teaches courses in retirement planning, financial planning, and insurance at the university. He is also first vice president of RNC Genter Capital Management.
ASJ: Just to review, how did AIG get into trouble in the first place?
WK: They really had a nice business niche, and most of it was overseas, but then, in certain areas, the margin became less productive, and they entered new areas in 2000 — home loans, CDOs, hybrid securities. They were making a ton of money, but then the housing market crashed at the same time as the recession happened. AIG had gotten big into credit default swaps … and when the housing market crashed, that basically took away the collateral [on the credit default swaps].
ASJ: So what position is AIG finding itself in now?
WK: A lot of its entities are worth money, but trying to sell in a down market is tough. An insurance company is only as good as its financial reputation. Nobody knows how to evaluate AIG right now, so it sort of gets difficult.
I worked for a company with a similar name to another company that went under. Even though it wasn’t ours, when people heard our company name and associated it with the other company, it affected our business. With anything tied to AIG, clients aren’t going to be happy. People will be transferring policies, trying to get out of them, or stopping payment on premiums. But, AIG is a large, diversified company. When you get into these credit default swaps, like any other time you get into a hybrid security, a lot of people don’t understand the risk involved.
All they understand is that everybody is making money. You come across these scenarios where you say, “It can never happen,” but things can happen, and they obviously did.