On the Line for Others' Losses

AIG's units cover many types of insurance, but its mortgage-related business has put it on the line to cover massive losses.
AIG's units cover many types of insurance, but its mortgage-related business has put it on the line to cover massive losses. (By Mark Lennihan -- Associated Press)
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By Zachary A. Goldfarb and Binyamin Appelbaum
Washington Post Staff Writers
Wednesday, September 17, 2008

After World War II, a far-flung insurance company in China run by an American businessman took a risky bet insuring that about 20 boats filled with Americans would make it back to the United States.

From those distant beginnings grew American International Group, which became one of the biggest insurance companies in the world, under the leadership of Maurice R. "Hank" Greenberg.

With more than $1 trillion in assets, AIG is bigger than Fannie Mae, Freddie Mac, Merrill Lynch, Lehman Brothers or the former Bear Stearns.

AIG's subsidiaries sell life, auto, property, workers compensation, kidnapping and ransom and many other types of insurance. The company offers retirement plans such as annuities. Its financial markets subsidiary serves investment banks, pension funds, governments and other institutional investors, and AIG manages portfolios of stocks, bonds and real estate. The company is the nation's largest leaser of aircraft.

Among the activities it ventured into: buying mortgage-related securities and offering other firms an exotic type of insurance to cover losses from investments tied to mortgages.

That proved to be a problem.

"AIG didn't have to be in those businesses," said David Schiff, a longtime observer of the company and editor of an industry trade publication. "Obviously they didn't think they were risking it. That's the problem: They didn't envision that the situation could have gotten so out of hand."

By Monday, it was clear that AIG needed emergency funds to keep it out of bankruptcy. The Fed turned down pleas for help from Lehman Brothers, which filed for bankruptcy protection Monday, but agreed to provide funds to AIG.

Analysts say most of AIG's businesses are, on their own, in fine financial shape. But what is happening on Wall Street is at the root of AIG's troubles. The steep decline of AIG's holdings of mortgage-backed securities has weighed heavily on the firm's balance sheet -- just as it has other fallen Wall Street firms.

But the role AIG plays is much broader than many other firms'. AIG has sold $80 billion in credit default swaps -- a type of insurance -- to investment houses to cover their losses on mortgage-backed securities.

As the mortgage market has melted down, AIG has been on the line to cover more of the losses. Seventy-five percent of mortgage-related securities insured by AIG were derived primarily from subprime mortgages, which are failing at unprecedented high rates. In all, AIG has posted losses of $25 billion.

AIG's difficulties could have unleashed further chaos on Wall Street if the company were unable to meet its obligations. AIG has estimated that it would be responsible for stopgapping $8 billion or more in mortgage-related losses.

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