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What to Do About AIG?

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Thursday, March 19, 2009; Page A15

A former AIG executive and others suggest better ways to aid ailing businesses.

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MAURICE R. "HANK" GREENBERG

Chief executive of AIG from 1967 to 2005

CEO Edward Liddy believes that dismantling AIG, once the world's largest and most successful insurance company, is the only way to repay the taxpayer money it has received. But AIG's history demonstrates that its businesses can be highly successful if properly managed.

From 1987 to 2004, the company's financial products unit contributed more than $5 billion to AIG's pretax income. In spring 2005, after I left the company, AIG's credit rating was downgraded. It would have been logical for AIG's new management to end or reduce its business of writing credit default swaps because of the risk it faced of having to post billions of dollars in additional collateral in connection with certain credit default protection. Yet AIG ramped up its credit default swaps business; significantly, the quality of the securities AIG wrote credit protection for deteriorated, and the company plunged into subprime mortgages. The results were disastrous.

AIG's management must consist of individuals whose experience is not limited to domestic, single-class insurers. Liddy's proposal to sell off all but the core insurance business echoes that of former Treasury secretary Hank Paulson. Yet liquidation is impossible because possible buyers for AIG assets at fair values do not exist. Fire-sale prices will bring taxpayers only pennies on the dollar.

The Obama administration should allow AIG to rebuild itself and earn the money necessary to repay the taxpayers. The government should extend the term of AIG's loan to 15 to 20 years and reduce its ownership percentage in AIG over time to allow private capital to replace taxpayer money. Sales of assets could be undertaken, as needed, in a more orderly fashion than is currently contemplated. Instead of additional loans, the government should provide AIG with federal guarantees, where possible, like those it has provided to struggling banks to backstop recovering assets. The goal of government should be not to liquidate companies but to restore them, so they can be employers and taxpayers.

As it stands, the federal government is using AIG as a conduit to pump massive sums to the counterparties of AIG's credit default swaps -- including major U.S. and European financial institutions. AIG's arrangements with these parties must be reevaluated and, if possible, renegotiated. The government should seek to recover some of the payments that have already been made to AIG's counterparties and replace those payments with guarantees.

AIG's insurance operations remain fundamentally strong. It can recover and repay the taxpayer assistance it has received, but only if the company and the Obama administration change their approach.

L. WILLIAM SEIDMAN

Founding chairman of the Resolution Trust Corp.; chief commentator for CNBC

The AIG episode proves that the government should take over and run failed financial institutions rather than be a part owner while trying to have the institutions run themselves. It also shows that the government should take more time. We paid off huge debts that AIG had in the swaps market, which we probably did not have to do. We honored AIG's bonus agreements, which we probably did not have to do. We bought a number of assets from AIG at high prices, which we probably did not have to do. That kind of haste with that kind of taxpayer money is ill-considered.

The government is a long way down the trail now, and at this point there's not much we can do differently. We have already committed to buying AIG's assets. We have already paid out all the swaps to foreigners. The big lesson? Don't rush into these disasters.

DOUGLAS HOLTZ-EAKIN

Former director of the Congressional Budget Office; senior economic adviser to Sen. John McCain's presidential campaign

The AIG debacle teaches us two things: First, it does not make sense to try to save any single financial institution. Failed enterprises should fail -- and go away. The government should only be in the business of preventing too much collateral damage to the economy. Had this been the focus from the beginning, taxpayers would not face the specter of their funds going to pay bonuses. And they would have been prepared to see their money flow to banks, hedge funds and every other sort of creditor of AIG as part and parcel of appropriately minimizing financial contagion.

The second lesson is that no matter how bad you think market capitalism is, the federal government has proved it is worse. Congress originally banned these very bonuses, then stripped the ban out of the stimulus bill and is now threatening confiscatory taxes on the lawful recipients. The Treasury knew about the bonuses and vouched for their legality but now wants double the money back somehow. How, exactly, the Treasury expects any straight-thinking financial entity to enter into a voluntary public-private "partnership" to solve the financial crisis given this track record is a mystery to me.




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