AIG 'too big to fail' - but the cost is frightening

If AIG goes under, the worker, the student loan payer, the car buyer and the homeowner are expected to suffer even more. Photo / AP

A new definition of desperate times: Even as the US Government threw a stunning new US$30 billion ($60.7 billion) lifeline to American International Group yesterday, the struggling insurance giant confirmed it had lost more than twice that much, US$62 billion, in a single three-month period.

And many more billions of federal dollars are almost sure to be shovelled into the company for a simple reason: Officials fear its collapse would cripple financial markets in the US and around the world.

The revamped bailout came as American International Group announced a quarterly loss of US$61.7 billion, pushing up its net loss for 2008 to US$99.3 billion.

The quarterly loss equates to nearly US$470,000 a minute. And it's more money than Bill Gates' net worth. It is the biggest in corporate history, topping the previous record of about US$45 billion set by Time Warner during the fourth quarter of 2002.

The source of trouble for AIG, which has 74 million customers worldwide and operations in more than 130 countries, is its business insuring mortgage-backed securities and other debt against default. That business imploded once the credit crisis struck with force.

The Government has now made four separate efforts to save the company, totalling more than US$170 billion.

AIG is so big and sprawling, so intertwined with institutions around the globe, that its downfall could set off a vicious chain reaction. Upheaval on such a global scale would plunge the US economy deeper into recession, drive up unemployment and stifle hopes for an economic rebound any time soon.

The company provides life, property and other insurance offerings, with 30 million policyholders in the United States alone. It also provides asset-management services and aircraft leases.

Its International Lease Finance Corp, which leases jets to airlines, has been up for sale and was thought to be one of the insurer's jewels. But falling travel demand has forced airlines to shrink fleets.

AIG's businesses also are linked to mutual funds, annuities and other retirement products held by many Americans.

"Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of Government inaction would be extremely high," the Treasury Department and the Federal Reserve said in a joint statement yesterday.

Turning AIG into a smaller, more viable company, "will take time and possibly further Government support," the Treasury and the Fed acknowledged.

Indeed, many analysts say the United States will eventually be forced to funnel billions more into the company, which the Government seized control of last year. And they say AIG has become a seemingly bottomless money pit that poses a cautionary tale about the effectiveness of US bailouts.

Mark Williams, professor of finance and economics at Boston University and a former Federal Reserve bank examiner, said he thought at least US$200 billion more would have to be extended to the insurer.

"AIG is holding the US Government hostage at gunpoint," Williams said. "The Government can't cut its losses because it is too far into AIG. It has no choice but to keep on pumping money into the company."

Said Terry Connelly, dean of Golden Gate University's Ageno School of Business in San Francisco: "If AIG fails, the taxpayer wearing his or her other hats - the worker, the student loan payer, the car buyer, the homeowner - will suffer even more."

"What's going on now is the Government is shifting from a tough-love lender to a little more friendly equity investor," Connelly said.

Under the new deal, the Government revamped its rescue package, saying it will give AIG an additional US$30 billion on an "as needed" basis.

The American public already is angry about using taxpayer money to bankroll a string of big financial company bailouts. Lawmakers also have expressed scepticism over the rescue strategies of the new administration of President Barack Obama.

Doubting investors have cut the company's share price to US45c.

Among its biggest problems: It can't find buyers for pieces of its company - such as Asia-based American International Assurance and American Life Insurance, which operates in 50 countries - that it hoped to sell to repay the Government.

As of February 13, AIG had sold interests in nine businesses.

In an interview on NBC's Today show, AIG chairman and chief executive Edward Liddy said: "The new US$30 billion is a standby line.

"It's not necessarily something that we think we'll have to draw on right away."

But Liddy, who joined AIG after its initial bailout and is paid an annual salary of US$1, backed off earlier statements about paying back taxpayers in full within two years.

THE NUMBERS

US$30b: The US Government's latest AIG rescue package.

US$62b: The amount AIG lost in the last three months of 2008.

US$470,000: The amount AIG lost every minute during the quarter.

- AP