Time to Pull the Plug on AIG

By Phil Kerpen

Director of Policy, Americans for Prosperity

The once-great insurance behemoth American International Group, or AIG, is now the living dead. It lives only because of massive taxpayer life support that is because of bailout after bailout of ever-increasing size. It started with a $85 billion bailout in September of 2008, which seemed outrageously large until taxpayers were forced to up the ante to $150 billion in December! The federal government now owns eighty percent of AIG, and is positioning taxpayers to make potentially unlimited future bailouts if AIG isn’t wound down.

In spite of all this taxpayer largesse, AIG is set to announce the biggest quarterly loss by any company in history on Monday –a $60 billion loss — and beg for more tax dollars. Can we finally say no?

It’s time to salvage the real businesses at AIG, sell them off, and pull the plug on AIG’s federal taxpayer life-support.

There are some divisions of the company that are in the traditional insurance businesses and are doing just fine. Those should be spun off. The cancer is the derivatives business, especially the credit-default swap business, which was central to the whole financial meltdown. Credit default swaps are insurance policies on bonds. Bondholders buy insurance to protect themselves in case the bonds they hold default. That is a risk-reduction strategy. But in recent years, people began buying enormous credit-default swaps without even owning the underlying bonds.

That’s a huge risk-magnification strategy –basically it’s just like casino gambling. One of the big risks those gamblers took is what’s called “counterparty risk.” That’s the risk that the person who sold you the insurance policy, in this case AIG, will be unable to play. Bailing out the folks who insured bonds they own may make sense for the sake of stability–although it’s arguable. Bailing out the gamblers who speculated in these swaps is completely unjustified. Gamblers who lost have no right to turn to taxpayers.

AIG’s cancerous credit default swap business can’t be saved. What all these bailouts do is use AIG as a conduit to funnel funds to all those gamblers holding swaps. I’ve heard that the biggest single holder of those swaps is Goldman Sachs, which may be one reason that company’s alumni have been so set on bailing out AIG. If we must bail out the companies who hold swaps written by AIG, we would be much better off bailing those companies out directly so they can be held accountable politically and in the court of public opinion.

There is simply no end in sight if continue to pour good money after bad in AIG. There are some businesses there that can be saved, but taxpayers cannot and should not be forced to pay what amount to bad gambling debts. We can’t get the old Ponzi scheme back up and running full-tilt for very long, as I wrote here yesterday.

It’s time to salvage the real businesses at AIG, sell them off, and pull the plug on AIG’s federal taxpayer life-support.

Phil Kerpen is director of policy for Americans for Prosperity.

http://foxforum.blogs.foxnews.com/2009/02/25/kerpen_aig/