AIG, the quintessential blue-chip, one of the 30 companies that compose the Dow Jones Industrial Average, a company that in 2000 boasted a market capitalization of $217 billion, making it the largest financial institution in the world, is teetering on the brink of collapse. Worth just $7 billion today, the future of what was until recently the world’s largest insurance company is hanging by a thread—that thread being the willingness of Wall Street institutions like Goldman Sachs and Morgan Stanley, themselves facing credit issues, to come up with $75 billion in rescue loans.
It used to be that investors who were worried about financial markets, or who didn’t like to take big risks, would put their money in what were called “blue chips”—companies that were deemed conservative, safe investments that could weather any storm. They had names like AT&T, General Motors, Ford, Boeing...and AIG.
Well, AT&T is a shadow of its former self, GM and Ford are both being talked of as dead men walking by analysts, Boeing is on life-support, or, since it is being propped up by its military contracts, more appropriately death support, and AIG, well, it’s already got one foot in the grave.
There really are no blue chips any more. The largest companies in the world, as Enron showed, can vanish overnight in a puff of smoke. Look at Lehman Brothers. Here today, then, poof, gone tomorrow.
In AIG’s case, if the insurance giant goes under, it may take a lot with it.
An article today in the Australian daily The Australian (Rupert Murdoch’s NewsCorp flagship and hardly a Marxian rag) put it this way:
Should the US Treasury and Federal Reserve fail in last-ditch efforts to secure breathing space for AIG, then sub-prime's cascading woes will have slowly smashed financial markets into worse shape than the legendary market meltdown of 1987.
And, from there, governments and banking regulators alike will have to ponder the previously unthinkable: are we on the way to a place comparable with 1929?
So what are anxious investors to do? Clearly there are no safe harbors in the stock market, which could as easily drop 40 percent or 70 percent tomorrow as rise 3 percent. Bonds don’t look much better. They may be more stable than equities, but not if the company that issues them goes bust. Then they are worthless scraps of paper, no better than the share certificates for Fannie Mae that are now being used to line cat litter boxes. The ratings agencies, like Standard&Poors, Fitch and Moody’s, while exercising their usual timidity about downgrading a major corporate entity, have belatedly knocked AIG’s credit rating down two notches today, which is their way of hinting that if you are an AIG bondholder, you have a significantly greater chance of losing your shirt.
Nor is it just investors who have to fear. Individuals who have tried to protect their families by purchasing life insurance policies, or who have sought to establish a secure retirement income by buying annuities from AIG, need to worry about whether the company will be around to make the payments when they or their beneficiaries need them. Sure, the states, which are responsible in the US for regulating the insurance industries, for the most part have established reserve funds to backstop insurance carriers, but like the FDIC which insures bank deposits up to only $100,000, these funds generally only back the first $100,000 of insurance or annuity coverage as a “cash surrender” value, or $300,000 as a benefit payout. But those state guaranty funds were designed to protect people from failures of fly-by-night insurance operations. They are woefully underfunded for companies on the scale of AIG.
AIG is such a giant in the insurance business that as one corporate treasurer told The Australian:
“If AIG collapses, then the world doesn’t have insurance.”
The New York Times, commenting on fears among ordinary people that their insurance or their annuities may not be there when needed, quoted one insurance adviser, Glenn Daily, who said a client who was an AIG policy holder was borrowing the maximum against his life policy, planning to park that money somewhere to see if the AIG crisis blows over. But he added darkly, “If everyone does this, the company could be driven out of business.”
Actually, it’s worse than that. As Michael Lewitt, a Florida-based money manager, wrote today in an opinion article in today’s New York Times, AIG is a key player in the $60 trillion (yes that’s trillion with a “T”!) credit swap default market, a huge, international and wholly unregulated field in which hedge funds play, and whose collapse would make the 1929 Great Crash look like a minor fender-bender.
So that’s what it’s coming down to. There are no Blue Chip refuges from the rolling disaster that is the US economy today. And there are no easy rescues—indeed according to one theory Treasury Secretary Henry Paulson let Lehman Brothers go bust because he knew he needed what funds the Treasury has left to try to keep AIG alive. It’s all a fragile, interconnected house of cards, propped up by a residual faith among ordinary investors who, at least so far, still think it has some kind of inherent structure to it. As card after card gets pulled out of that rickety stack—first Bear Stearns, then IndyMac Bank, then Fanny Mae and Freddie Mac, then Lehman Brothers, now perhaps AIG and Washington Mutual, a large savings institution that is on a death watch—at some point those investors and now insurance clients, too, may all decide to take their money and go home, and the whole thing will come crashing down.
The good news is that, if the US economy collapses, the Pashtun farmer in northeastern Pakistan, the Iraqi shopkeeper in Fallujah, the Iranian worker in Tehran, and the peasant in Venezuela, will no longer have to worry about being bombed or having their children mowed down by a US helicopter gunship. The US would no longer have the funds to pay for such foreign wars. And because a collapse of the US consumer economy would also drag the rest of the world into a prolonged global slump, perhaps reminiscent of the 1930s, we might actually see a significant enough drop in carbon emissions from idled cars, factories and power plants that the global warming catastrophe that is threatening us all will be significantly delayed, giving humanity time to come up with a serious long-term response.
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