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Bailout For AIG Is Not Needed

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The Tampa Tribune

Published: September 30, 2008

The magnitude of the bailout demanded, rather than proposed by Treasury Secretary Henry Paulson, is astonishing. Take AIG, American International Group, an insurance company worth over a trillion dollars. Paulson says it will cost $85 billion to save AIG.

Is AIG an American company? Now headquartered in New York, it was founded in Shanghai, China in 1919, by an American.

Is AIG in trouble? AIG paid a dividend on Sept. 3, although further dividends are suspended, according to Investment News. The dividend should not be a surprise since AIG has earned $6.2 billion this year. A major subsidiary, Transatlantic Holdings, also gave out a dividend, payable on Sept. 18, noticeably higher than its previous dividend.

On Sept. 16, the U.S. Treasury acquired warrants to buy 80 percent of AIG stock. On Sept. 18, AIG announced that it was plowing more money into its Nigerian operation, Blue Financial Services.

Does AIG need help or does it just have plenty of money to hire lobbyists? How did AIG become so large that it cannot be allowed to fail? It happened by repeated acquisitions of smaller companies. American General, AG, acquired 12 major companies, all insurance and financial, between 1945 and 2001.

In 2001, AIG acquired American General. Since 1990, AIG has also acquired International Lease Finance, 21st Century, HSB Group, Matrix Direct, and insurance interests from General Electric. It also acquired California-based Sun America for $18 billion.

That list only hits the high points. In August, AIG acquired an 18 percent interest in a Chinese company. In June, AIG acquired Ascot. In 2007, AIG spent billions of yen to buy two extremely prestigious office buildings in Japan. In May of 2007, AIG outbid Equity Consortiums to buy the largest phone company in Bulgaria. In 2006, AIG bought Travel Guard International.

AIG is suing seven former executives, including the ex- CEO for $20 billion in misappropriated stock. This information is available from standard business sources.

Classical economics, the supply and demand theory, depends on large numbers of suppliers and large numbers of consumers. The modern economy has large numbers of consumers but mergers and acquisitions have greatly cut down on the number of suppliers. The result is a great concentration of economic power in the hands of CEOs accountable to no one.

Likewise, classical economics assumes that consumers understand the products they buy. When farmers grow corn, there is little doubt that consumers know what corn is and what you can do with it. Do consumers understand insurance policies issued by companies like AIG?

The possibility of forcing U.S. taxpayers to bail out AIG raises grave questions. AIG has operations in over a 100 countries. If it is so important to bail out AIG, are other governments going to contribute? U.S. taxpayers have limits.

What can we learn from past federal takeovers of private companies? In 1971, Congress voted to bail out the Penn Central railroad. The public was told that Penn Central was too important to fail. Critics pointed out that the holding company that owned Penn Central also owned $7 billion in real estate. Why couldn't the company sell some real estate and modernize the railroad?

The same question applies to AIG. Even if we accept that AIG is in trouble, which is not obvious, it has subsidiaries and properties all over the world. If AIG needs money, it can sell some of them. I'm sure the creditors can wait for these sales to take place.

In the early 1980s, the federal government bailed out Chrysler. In retrospect, this bailout was a success. It rescued an American company and prevented further concentration of the auto industry. My associates at the time included business executives and presidents of small firms. They argued vehemently that Chrysler executives should get no raises or bonuses until the loan was repaid.

Treasury Secretary Henry Paulson is a former CEO of Goldman Sachs, one of the remaining investment firms. While turmoil in the financial markets is a problem for all of us, Paulson does not see these events the way ordinary citizens do. If a trillion dollar bailout package is put into place, average taxpayers will have to pay it off eventually. The longer it takes to retire this debt, the more it will cost Main Street taxpayers.

Financial turmoil is costing Americans but I have seen no calculation that shows that the projected bailout will save most Americans more than it costs them.

How long do we have to make the decision? Years ago an older man with experience in business taught me to be wary of anyone who wants an instant decision. It can be a sign of a con man. Do Republicans understand that they will have to choose between their beloved tax cuts and a trillion dollar bailout? Surely we cannot do both.

Dale L. Gillis lives in Sebring

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