IF AIG Fails / Goes under

So, any ideas on what happens to our policies if AIG goes under / declares chapter 11?

it depends on what type of policies you have and it also depends on your state of residence.

not to seem to celebratory, but this is the reason i have RAILED against AIG for so many posts on these forums. in the end, AIG may survive relatively unscathed. however, when dealing with protective issues (ie any insurance) do you really want to have this kind of stress?

1MO -- so, what does this bailout mean? As a taxpayer, all I see is more and more debt we can't afford. Is this bailout worth it?

It is really only a bailout in the sense that the government has made a pool of cash available for borrowing. They're not giving them anything. The government is going to charge AIG a little more than 11% in interest. Of course, if AIG goes under after borrowing for liquidity, then the taxpayers have a had a loan defaulted on them. For this reason, the government is trading a controlling stake in the company to protect the princiapl from deafault and in the event of a liquidation, it can be overseen to help ensure the receipt of principal from the proceeds.

Still, I'm not sure how feel about so much government involvement.

This is more of a nationalization if you ask me and the consequences will be dire, namely massive further dollar devaluation.

i agree with the concept of nationalization of the means of production in our company. so much of our economy is tied to the broad financial companies that to have more and more of them controlled by our most inefficient government just scares the crap outta me.

puck, while price has already answered the mechanism of the "bail-out" the deeper question was why do they need it anyway. well, as the WORLD's largest insurer it has claims paying responsibilities. a hurricane (or two or three) just swept through the country and tonnes of folks expect their claims to be paid FROM AIG. people died today that had life insurance policies FROM AIG. people have annuities they are using for income in retirement that are FROM AIG.

while it would be nice to have the money you need to pay these claims, if you have a short term money crunch (like three hurricanes), it is nice to be able to take on a short term loan to cover your client needs. AIG had so over leveraged itself that not only was there insufficient cash reserves, but they couldnt go borrow any money cause no CORPORATE lender wants to lend money it might not get back.

AIG should have died. it woulda cleaned out the pipes. we coulda started some type of recovery. they poorly (hmmmm, they criminally) mismanaged their business. that sucks, but the wages of sin is death. i just hope if i do something monumentally stupid and my company fails, Uncle Sam is willing to throw me a few million to keep me in business.

what a shame!

So my understanding of the AIG bailout is that the Fed Govt is giving a bridge loan to cover short-term liabilities to AIG's HOLDING company and that AIG subsidiaries that hold the insurance policies are well-capitalized.

Could this then happen to a mutual company? Namely, the big three: NY Life, NWM, and MassMutual? Do they have separate departments such as insurance and holdings and, if so, don't they typically stay away from non-conservative investments?

The question i am trying to get to is whether AIG's situation is likely to be revisited by any other major insurance company.

AIG's insurance component (life & annuity) is still healthy and there is no real threat to policyholders. The reason for this is because insurance reserves are properly reglated, treated and accounted for seperately, and must be made with conservative investments for compliance purposes. It is the subsidairy businesses and the name of AIG itself that is in danger. Regardless of reality, perception is a powerful thing. To have your financial future with a company that is against the ropes will hurt them for years in attracting new business, and possibly retaining current business. The mutuals, as far as conservative investing are king. They may be considered stodgy by some, but they have almost entirely avoided the investments that are pulling things down...making them wise in these times.

My best guess is that if you see anything else come down the pipe it will inevitably be a stock company. I often recommend strong mutuals to clients, and now I am happy that I have...vindicated if you will. At the time, I had to explain ad-nausium why they should forgoe half a point of interest to choose a strong mutual over a stock company.

1MO, let me acknowledge that I agree with you more than not (and you are dear to me), but the fact of the matter is that policyholders are not in danger of default. Even if AIG goes belly-up, industrial reinsurance or another provider will honor the contracts that they paid 30 cents on the dollar for. Also, keep in mind that I was speaking primarily of term insurance when making the debate. Term insurance is a commodity because the contract is a contract is a contract. If it was a whole life or other permanent insurance product, I would never have backed AIG as strong because the only thing that would have be to honored by law is the guaranteed column...not the "current" or proposed column. This could kill a permanent policy.

They are what they are...a strong, cheap (now everyone knows why) term provider.

So, my employer-sponsored life insurance, which is through AIG, is okay? YAY!

Yes it is Puck...yes it is.

Isn't this recent bailout just putting another Band-aid on a severed arm? AIG is just another huge company in recent news that has either been bailed out, bought out, or gone under (Bear, Lehman, IndyMac, Freddie & Fannie, and the list goes on and on). Now, Morgan Stanley, WaMu and several others are on the verge of making CNBC headlines and possible furute 4% market drops.

The question is, where does it end & what can be done to stop it?

The question is, where does it end & what can be done to stop it?

One argument would be...NOT to stop it (or at least don't completely stop it)...if all these problems were caused by "bubbles" (which by definition means overvalued assets - in this case, mortgages/real estate), then you have to let the bubble burst to get back to normalcy. To make a medical analogy, when you go to your doctor and you have pneumonia and you are coughing up phlegm like crazy, many doctors (who care more about your body recovering than making you happy in the short-term) will advise AGAINST cough medicines because you have to cough it all out. Coughing is a standard way to get rid of the remnants of the infection. Suppress the cough, and it may slow your recovery. Or, if you had an abscess under your skin, the surgeon would cut it open, drain the pus, and LEAVE IT OPEN. why? so all the pus that needs to keep draining out can get out. closing it up again will only cause ANOTHER abscess to form.

There are underlying market forces here at work that need to run their course. i am not advocating letting our financial system completely collapse, and i know there is room for debate about how much regulation/bailouts/govt takeovers NEED to occur, but ultimately this bubble or pimple or abscess has to pop and drain. yes, my 401k and IRA are biting it as we speak, but i'm in it for the longhaul so i'm comfortable riding this one out.

Unfortunately, the answer lies in a thorough understanding of the fundamentals. However, the general public responds to the media, which sells headlines on fear and does not educate the masses. The botton line is that ALL of these companies should have been left to fail in an efficient market. The government is NOT saving the economy, they are saving the confidence (which is emotional) of the general public. The economy is dynamic and responds to supply and demand, devoid of emotion. Like nature, it is wicked and unforgiving to the less adapted to survive.

In short, the bailouts are mental in nature, not physical. If confidence (emotion) falls, then people stop investing and pull their money from the economy and begin to hoard it. This causes runs on the banking system and highly depreciated stock values. When the runs begin on banking, credit sources go down and when stocks depreciate the ability to borrow cheaply diminishes. It is a compounding reaction.

I believe the government bailouts are actually working against the market as a whole. This is because there is no consequence recognized by these companies for their irresponsible actions. Like a child, they are teaching them that is OK, daddy will bail you out.

What will stop it? Full disclosure and recognition from the companies that are in trouble and the media to stop hyping the "end of days".

That is my educated personal opinion.

To make a medical analogy, when you go to your doctor and you have pneumonia and you are coughing up phlegm like crazy, many doctors (who care more about your body recovering than making you happy in the short-term) will advise AGAINST cough medicines because you have to cough it all out. Coughing is a standard way to get rid of the remnants of the infection. Suppress the cough, and it may slow your recovery. Or, if you had an abscess under your skin, the surgeon would cut it open, drain the pus, and LEAVE IT OPEN. why? so all the pus that needs to keep draining out can get out. closing it up again will only cause ANOTHER abscess to form.
Pochax, this is exactly what I was trying to say. Very well done.

So, does everyone who went from sub-prime to bankrupt/defaulted now bump up (actually down) those that were a notch below sub-prime (the name escapes me) to become the new sub-prime?

You’d think anyone with a credit score above 700 would have lenders feeding them grapes and fanning them iin hopes they will help fatten their depleted coffers.


If all these people’s credit went from bad to worse and lenders make it harder to borrow, where the heck do we go from here?

If all these people’s credit went from bad to worse and lenders make it harder to borrow, where the heck do we go from here?Stop saving them, let them die. The market will reward those who were prudent and punish those who were not. That is the essense of our strong and highly successful American capitalist economy.