Filed under: JPMorgan Chase (JPM), Federal Natl Mtge (FNM), Goldman Sachs Group (GS), Amer Intl Group (AIG), Lehman Br Holdings (LEH)
It seems the question many are asking now is whether American International Group (NYSE: AIG) should be saved or not. Many weigh the consequences of free markets, allowing the cards to fall where they will vs. trying to minimize the economic impact such a failure could cause.
The problem with the argument of free markets is that they aren’t really free, as banks, brokers and insurance companies are regulated, assisted and protected by a wide variety of governmental mechanisms. Nor has Wall Street been free of government intervention and aid during this whole crisis (and before). While Lehman Brothers (NYSE: LEH) and AIG have so far been denied aid, the purchase of Bear Stearns had government guarantees, not to mention the recent nationalization of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).
Not only is there precedent for government intervention, many say that the collapse of AIG should be feared much more than that of Bear Stearns, Lehman or Merrill. Experts say this would present a systemic threat and destabilize global, not just U.S., markets, since as an insurance company (as opposed to a regular financial institutions) the interdependencies are vast. If AIG fails, its network of derivative contracts also fails, and these “are held by banks, investment banks, hedge funds, insurance companies and mutual funds as well as multinational corporations” all around the globe.
The options available for AIG are limited and getting more limited by the minute as its ratings are cut further, triggering margin calls. Barron’s reports that the Fed turned down AIG’s request for a $40 billion loan, and instead approached JPMorgan (NYSE: JPM) and Goldman Sachs (NYSE: GS) to help with a $75 billion financing package for a private sector solution. Other options for AIG are the use of $20 billion in assets held by subsidiaries and, of course, talk of possible asset sales are abundant.
Even Jim Cramer, capitalist extraordinaire, believes it would be a tragedy if the government lets AIG fail. AIG might have been able to save itself had it not been for the current free-fall climate, but it can’t do so alone now, he says.
While taxpayers may fear footing the bill to save AIG, it’s possible they should fear not saving it much more. It’s true that all this talk about government bailout churns my stomach. The government doesn’t bail out the Average Joe as he’s losing his house, so why should it save AIG? But looking at the bigger picture, it’s likely that saving AIG would in the long run help save many more Average Joes.
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