AIG to U.S. Taxpayers: "Your Money or Your Life (Insurance)"

[McCamy Taylor]

How could insurance giant AIG threaten the American people with loss of their life insurance as they appeared to be doing in this memo to the Treasury last month:

http://abcnews.go.com/images/Business/aig_systemic_090309.pdf

When state laws (which regulate the insurance industry) prevent insurance companies from using the capital of their other lines (such as life insurance) to back their mortgage insurance line?

http://faculty.haas.berkeley.edu/JAFFEE/Papers/094lRIO2006.pdf

http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1056&context=iber/fcreue

Answer:

Twenty five articles and three hours of Googling later, I am still trying to answer this question.

Monoline insurers (also referred to as "monoline insurance companies" or simply "monolines") guarantee the timely repayment of bond principal and interest when an issuer defaults. They are so named because they provide services to only one industry. <1>
The economic value of bond insurance to the governmental unit, agency, or company offering bonds is a saving in interest costs reflecting the difference in yield on an insured bond from that on the same bond if uninsured. Insured securities range from municipal bonds and structured finance bonds to collateralized debt obligations (CDOs) domestically and abroad.
Insurance regulations prevent property/casualty insurance companies, life insurance companies, and multiline insurance companies from offering financial guaranty insurance. The monoline industry claims that it has the advantage over multilines of sole focus on capital markets.

http://en.wikipedia.org/wiki/Monoline_insurance

If you look at the corporate structure of AIG and its many different types of insurance offerings, it is clear that the company is as multilinear as you can get.

http://www.reuters.com/finance/stocks/companyProfile?symbol=AIG.N&rpc=66

In light of the massive losses which a mortgage/municipal bond insurer can suffer if there is an economic catastrophe (like a Second Great Depression) or a severe downturn in the housing market or if a city goes bankrupt, these laws were passed to protect consumer’s other insurance policies---you know, their auto, home and especially their life insurance. Companies like AIG were never meant to place ordinary life insurance policy owners in the unpleasant situation of having to agree to a multi-billion dollar bailout in order to protect a personal quarter of a million dollar term life policy.

The states guarantee some of your life insurance, should your company go belly up. Here are the levels of coverage by state.

http://www.annuityadvantage.com/stateguarantee.htm

Note that many people have policies worth more than the maximum payment allowed. In addition, if a state is forced to start paying up on life insurance written by a bankrupt company, customers can expect increased delays and other hassles. And what state has the funds to start forking over a hundred thousand dollars at a time to people who want to cash in their whole life policies? Worse yet, many of the people insured for term life insurance would no longer be able to get another policy with a different company, because they would now be too old or have medical conditions they did not have ten or fifteen years ago. With the aging of America, a threat to cancel everyone’s life insurance by a company like AIG is not something that anyone can take lightly. Indeed, life insurance may be second only to the home as form of American middle class wealth. If the breadwinner dies, the family can count upon life insurance to see them through hard times----that is how it is supposed to be.

So how, with all this regulation in place to keep the insurance industry from risking the nation’s life, home, auto, disability and other insurance, did AIG manage to get itself into a position in which it can claim that insurance as we know it will cease to exist if the company does not get more money to pay off its clients who made unsound investments based upon mortgages which were written fraudulently?

Seems to me that the only thing that would cease to exist is AIG.

However, that has not stopped a flurry of articles which describe why AIG needs to be propped up to protect our life insurance.

http://www.subprimeblogger.com/life-insurance-crisis-could-your-policy-really-disappear/

All this talk of the life insurance crisis is enough to turn your hair gray---even though life insurers are reportedly suffering only minimal losses from the current economic downturn. Why, it is almost as if someone is using the old Bush-Cheney terra tactic in an attempt to scare us into parting with more money that ought to go to universal health acre and improved education.

This did not all happen overnight. A year ago, Gov. Eliot Spitzer testified before the U.S. House about problems with companies like AIG. At the time, he said they either needed to be “recapitalized” or broken apart, so that the risk from the bad policies covering bad mortgaged back securities did not threaten other insurance lines.

http://www.wileyrein.com/publication_newsletters.cfm?id=27&publication_id=13507

Same subject, different source:

http://www.nytimes.com/2008/02/16/opinion/16sat1.html?_r=1

With major bond insurers hobbled by an ill-advised foray into subprime mortgage territory, Mr. Buffett made a tough offer aimed at the biggest and healthiest chunk of their ailing business. The insurers either turned Mr. Buffett down or haven’t responded, which puts the onus on them to devise their own rescue plan. Mr. Spitzer on Thursday gave the insurers five more days to do just that. If they fail, they face a potential breakup by New York State’s insurance regulator.

The financial industry was not amused.

http://strategicinvestor.blogspot.com/2008/02/eliot-spitzer-and-mortgage-insurance.html

In fact, this is the worst possible outcome for bond insurance. It defeats the very CONCEPT of insurance. As we know, insurance is based on the empirical evidence that it is easier to predict outcomes for an entire population than for an individual member of that population. Since the risk (as measured by the standard deviation of the outcome) faced by the individual (early death, dismemberment, etc) is higher than that of the population, it is possible to make money arbitraging the difference. This is called underwriting. Everyone wins.
Furthermore, there is another well-known principle in investing, which is diversification. Diversification of risk tends to reduce the overall risks of a portfolio, even when the risks show some correlation.

Now, I will be the first to admit that I am not a trained investment analyst. However, it seems to me that only the people who deal in worthless bonds win in a situation in which the likelihood that you will not die tomorrow is used to offset the risks associated with toxic mortgages. Because, if they can get companies that are swimming in life insurance and auto insurance and other premiums to write policies securing their worthless pieces of paper, when buyers realize that the paper is worthless and stop buying, these traders in worthless paper will have a deep pocketbook to raid.

By the way, the New York Times reports that AIG will not tell anyone who got our tax payer money ($85 billion last fall, total of $160 billion). I am still waiting to hear if Carlyle Group’s $16.6 billion was one of the debts that Bush arranged to have paid off.

http://www.nytimes.com/2009/03/08/business/08gret.html?_r=3&adxnnl=1&ref=business&adxnnlx=1236502889-+AeFgr9ecukV/IrkscDfoQ

When Congress demanded to know who got the money and how AIG was allowed to get into such a mess, they got the run around.

http://www.nytimes.com/2009/03/06/business/economy/06insure.html?hp

Tens of billions of those dollars have merely passed through A.I.G. to its derivatives trading partners, shielding them from losses. The Fed has refused to provide the names of those financial institutions, and senator after senator, Democrat and Republican, said that was an outrage.
snip
Mr. Kohn said the Fed believed that the only hope of recovering the taxpayers’ money was to get A.I.G. back on its feet, doing business as usual — and that meant respecting its customers’ privacy.

In case you are wondering who in the federal government was supposed to be overseeing AIG, be sure to scroll down to the bottom of the article to learn how their purchase of an itsy-bitsy savings and loan meant that

A.I.G. came under the Office of Thrift Supervision.

Allowing the Bush administration to plead incompetence. Maybe it is just me, but how come the “incompetence” of the previous administration always erred in the favor of the big corporation and GOP donor? If all the insanity was completely random, wouldn’t they have done something right from time to time? I suppose a person could accidentally wander into a bank wearing a ski mask, however, it is statistically impossible to accidentally perform all the steps necessary to rob a bank unless you mean to rob the bank.

I think that the Bush administration meant to rob Americans of their homes. And I think they meant to go after our life, home, disability and other insurance, too, as a way to protect themselves from the inevitable losses that would accompany their criminal investment schemes---

Which raises the point---why isn't AIG in court contesting the mortgage insurance policies it wrote on the grounds that it assumed that it was covering mortgages written in good faith. Could it be that AIG would rather rob the US taxpayer than take on Bank of America?



Note that rival insurance giant, MetLife wants to buy AIG’s life insurance line.

http://www.pbn.com/detail/40571.html

However, if AIG can threaten the U.S. government into giving it billions more every time it wants some money just by saying “You better if you know what is good for your life insurance policies…” then I do not see them selling. Blackmail is too lucrative.