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Should AIG Units Be Placed into Bankruptcy?

Posted by Larry Doyle on May 26, 2010 3:17 PM |

Our financial regulators, government officials, and central bankers may believe the shell game being played with AIG might work to lure buyers into the AIG den but the fact is AIG remains the institutional equivalent of  ‘dead man walking.’

Who gets that and is not reluctant to speak her mind? Tarp watchdog and consumer advocate Elizabeth Warren. Her courage on this topic is on display today while AIG chairman Robert Benmosche would like to continue to shuffle the shells around in an attempt to continue to play the game.

Bloomberg highlights these contradictory views in reporting, Benmosche Sees ‘Clear Path’ for AIG to Repay U.S.,

American International Group Inc. Chief Executive Officer Robert Benmosche told a congressional panel the firm is “on a clear path” to repaying taxpayers, while the committee’s chairman said the bailed-out insurer may need to weigh putting units in bankruptcy.

AIG will repay a Federal Reserve credit line after deals to divest two units for about $51 billion are completed this year, Benmosche said in remarks submitted to the Congressional Oversight Panel. The insurer will then turn to repaying Treasury Department obligations, he said. AIG is committed to selling its AIA Group Ltd. to Prudential Plc, Benmosche said.

“We are well on our way to remaking AIG into a more streamlined and focused company,” Benmosche, 66, said in the testimony. The insurer is “less reliant on government aid and has been able to instead tap the capital markets. AIG is now on a clear path to repaying taxpayers.”

Really? Do you believe that? What does TARP overseer, Elizabeth Warren, have to say about AIG? Bloomberg reports,

The oversight panel is led by Harvard University law professor Elizabeth Warren, who earlier today questioned Benmosche’s approach by saying that the U.S. may need to weigh putting AIG units into bankruptcy. She didn’t specify which units could be candidates.

“Maybe some of them need to go through bankruptcy, and really reorganize it at a faster pace,” Warren told CNBC before the hearing. “We at least want to talk about that and hear the government explain what its view is.”

Rules that are fundamental to a free market would’ve dictated that shareholders be wiped out and creditors take losses had AIG been allowed to fail in 2008, Warren said. The insurer’s size and ties to other financial firms made AIG a “corporate Frankenstein,” which made companywide bankruptcy untenable at the time, she said.

“Its complexity, its systemic significance, and the fragile state of the economy may all arguably have been reasons for unique treatment,” Warren said. “The fact remains that AIG’s rescue broke all the rules, and each rule that was broken poses a question that must be answered.”

Violating free market principles does not come without a real cost. Just how expensive that cost ultimately turns out to be is the crux of each of those pending questions highlighted by Elizabeth Warren. Now that AIG is 80% owned by you and me, the costs of bankruptcy will be borne by us while the crowd at Goldman and its brethren on Wall Street will have accrued the benefits.

Freedom and free markets aren’t free but the costs and the pain should be more equitably shared.


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