In what is the single most stunning financial development of my now 50 years on this earth, AIG was effectively nationalized by the Federal Government yesterday with the agreement of a $85 billion bail out and purchase of the crippled insurance conglomerate. If this had happened under the watchful eye or the hand of Franklin Roosevelt, John Kennedy or Bill Clinton we would be treated with screams from my friends and fellow travelers in the Republican party that we were being socialized and it was something we would have to fight with every resource we had. However this morning the silence by the Republican party on what is the single most stunning financial rescue of our time, dwarfing even the nationalization of Fannie Mae and Freddie Mac, is deafening.
To get an answer on why this is being written in certain quarters as " a good deal for the American Taxpayer" or the best solution to a bad problem you only need to look at the money trail leading up to AIG and the Republican corporatists who have seized control of the party in the last 15 years.
As anyone who has spent any time at all in the insurance industry knows, the "tort reform movement" was the brainchild and largely financed by AIG and other property casualty firms back in the 1980s when an artificial crisis in reinsurance was created to drive up pricing on excess/surplus and reinsurance coverages. When the companies saw how effectively they could pass along the blame for higher insurance costs on the supposedly run away verdicts and litigation costs in America to the trial lawyers, they devised the next stage in their plan. That was to move on a state and federal level to cap damages on all types of claims such as medical malpractice and work to limit punitive damage awards. The gambit has always been that any actuary can devise a profitable pricing on a line of insurance when they know that their upper limit on damages is capped in any fashion. It becomes a no lose profit making line of coverage when they know exactly what the upper limit is on a potential claim.
However, to get the legal and legislative cover to change laws, elect judges, run state wide referendums and pack the courts it takes money and lots of it. Enter AIG and all of the other major casualty companies who had the biggest stake in the game to get limits on damages, allow for preemption of state courts and strip citizens access to the courts. It may be lost to history the amount of money that was paid by AIG, it's political action committees, executives, agents and affiliates to fund state and federal tort reform measures, but you can only imagine the money spent from the mid to late 1980s until now.
So, when AIG was tottering on the brink over the last week and Lehman Brothers was allowed to fail and essentially wipe out billions of dollars of shareholder value and equity, AIG made the government blink and was instead nationalized through a $85 billion buy out and loan to keep it from imploding. My questions, which hopefully I can discover answers to over the next weeks as the details of this epic drama are slowly revealed, are as follows:
1. Will the entire management team that presided over this debacle at AIG be fired with out golden parachute buyouts financed by the American taxpayers money, or are we going to find out that this wrecking crew is receiving millions of dollars for destroying one of the premier insurance companies in the world?
2. What role did the fact that AIG was one of the major funding and operational engines of the tort reform movement play in the final decision by the Fed to bail them out, while Lehman Brothers, a non-tort reform player was allowed to collapse? We may never know, but if anyone for a moment thinks that the millions spent by AIG on tort reform getting Rockefeller Corporatist Republican's elected didn't give them superb access at the highest levels of Treasury and the White House you are being exceptionally naive.
3. What in gods name was NY Governor David Patterson and the NY Department of Insurance thinking when they approved a $20 billion transfer from AIG Insurance units as a loan to the parent company? Those insurance company assets and reserves are held specifically to protect the life, annuity and pension policyholders who count on those benefits and I would love to know what pressure was applied to spring a loan of that size to the big AIG entity. That is one of the single most troubling questions of this entire AIG saga in my mind.
4. How quickly will the life units of AIG be spun off and sold to other life markets and what will it do to the now diminished credit ratings of American General and AIG? Allstate has already sent out a letter dropping AIG from their approved list and I suspect others will follow suit today. I find it oddly amusing that after 20 years of hearing that I wasn't good enough to do AIG casualty business that AIG is now off MY approved list of companies. Karma is a bitch at times.
In short, the structured settlement world is about to change in a major fashion due to the inevitable spin off and sale of some many of the parts of AIG. Gone are the days of enforced defense only structures, requirement to fund structured settlements with AIG life markets and the AIG approved brokers calling the shots.
The world as we know it has changed. Buckle in, it's going to be interesting.