Word that Benjamin Lawsky has ordered his New York Department of Financial Services to revisit the American International Group Financial Products (AIGFP) madness is deeply disturbing. That is because it may resume the process of turning AIG from its prior role as the equivalent of a 10-carat diamond into an ugly lump of coal — a process stopped by prompt and responsible federal intervention.
The probe is re-examining the risk management practices at AIGFP that led to AIG’s emergency takeover by the Federal Reserve Board in 2008. However, from this vantage point, it appears to be a misstep that will interfere with the ongoing process of righting a huge ship that foundered on the shoals of reckless and mindless decisions of a group far removed from the core business of AIG.
There is no question that AIGFP acted recklessly. It used the balance sheet of a mega-insurance company to speculate in what turned out to be a spectacular housing bust.
AIG had such a dominant position in world life insurance markets that European insurers persuaded their negotiators to contend in the Doha round of trade talks around 2001 that AIG’s AIA Group had an unfair advantage as the only insurer doing business in China that didn’t have to have a Chinese partner. Former Chairman and CEO Maurice “Hank” Greenberg then involved the U.S. Trade Representative in the talks defending AIG’s position, and the European initiative failed. But, it spoke to AIG’s strong competitive position in the world’s fastest-growing market.
AIGFP constituted only 6 percent of the annual revenues of AIG at its peak, according to information provided at several industry meetings. It issued credit default swaps with a notional value of $2.77 trillion and used reserves held in its 13 life insurance units to collateralize speculation in approximately $80 billion in MBS of various grades.
The housing bust, and the ensuing global financial crisis, however, forced AIG to seek federal help, resulting in the need to sell 79.9 percent of itself to the Fed in order to meet margin calls on the credit default swaps (CDS) and therefore escape insolvency.
The Fed and the Treasury Department were able to right the ship, and completed the process of re-privatizing the company by September 2012.
But the cost was high. To do so, the federal agencies required AIG to divest itself of a laundry list of subsidiaries that had allowed AIG to be the dominant U.S. player in world insurance markets.
In other words, AIGFP’s reckless speculation impacted not only AIG’s employees, shareholders, agents and brokers, but also U.S. international competiveness. A primary component of this is that the people tasked with bailing out AIG had little knowledge of the insurance business. A provision of the Gramm-Leach-Bliley Act of 1999, demanded by the insurance industry, barred the Fed from overseeing insurance holding companies. Moreover, the effort by members of Congress to distance themselves from any accountability for their obvious role in the lack of oversight that led to AIG’s problems put intense pressure on the Obama administration to exit AIG, and show a profit in doing so. Combined with the lack of federal expertise on insurance matters, including their lack of knowledge of the U.S. presence in overseas growth markets outside of AIG, federal regulators decided that divestiture of strong foreign affiliates, even at fire sale prices, was the quickest way for the Obama administration to put AIG in the rearview mirror. AIG now has excellent management. But it is facing competitive challenges in markets it once dominated, such as property and casualty and specialty markets.
Another look at a sordid recent past, especially now that AIG will soon have both state and Federal Reserve oversight, is unnecessary. Lawsky should look at what New York has to lose if AIG’s growing momentum is reduced. New York is the beneficiary of the taxes paid on the salaries of AIG employees. The high property taxes on the trophy building AIG occupies in lower Manhattan, and on the nearby buildings that other AIG employees occupied, also benefit the city and state.
Let the past go, Mr. Lawsky. AIG employees, shareholders, partners, federal officials used as scapegoats for its failure, U.S. competitiveness overseas — all have suffered from the reckless activities of AIGFP. Now is the time to move on, not relive a horrible memory.
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