March 2nd, 2009
08:26 PM GMT
NEW YORK – It has been called a black hole. The insurance giant American International Group is sucking in billions of dollars in government aid that just seems to vanish.
AIG managed the biggest quarterly loss in corporate history.
Ask analysts how AIG managed to lose almost $62 billion in just three months and many will just shake their heads and throw up their hands.
In good times, the company's balance sheet could be hard to decipher; in this crisis it has become a gargantuan task.
In an attempt to get to the bottom of it, I went through their press release.
There were billions in unrealized market valuation losses, derivative losses, goodwill impairments, tax benefits not obtained.
I ended up more confused. Especially when I saw the $2.3 billion chalked up to OTHER!!!
Thankfully, my colleague Ali Velshi interviewed AIG CEO Edward Liddy and pushed him to try and explain it in plain language.
This is what he said. "We have a $600 billion investment portfolio, it's invested in equities; equities are declining in value. It's invested in certain forms of real estate; real estate is declining in value. We have to take that decline and put it through our P&L, that's what drives a good portion of that $62 billion loss."
Okay, that makes a little more sense.
Just like my house and my 401K which have plummeted in value and hurt my net worth, AIG's assets are tanking and they are acknowledging those losses.
How did a boring insurance company find itself in this position?
In the 1990's AIG expanded from their traditional role of selling life insurance and retirement products and got heavily involved in the complicated derivatives market.
Analysts liken it to building a hedge fund on top of the regular business base.
In the boom times that quasi-hedge fund made the company billions, but when the U.S. subprime market cracked a lot of those derivative contracts came back to haunt them.
In Liddy's words, they got involved in a business they didn't fully understand. That is an understatement.
Unfortunately we are now paying the price.
The U.S. government has ponied up $180 billion in aid and backstops and some estimate that bill could ultimately run half a trillion dollars.
European banks remained exposed. Retail customers around the world worry that their policies are safe.
Are you one of those customers who hold an AIG policy? Do you agree the government should stand behind the company or does there come a time when enough is enough?
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