Remember when the US Government stepped in to “Save” AIG? (even though AIG is an insurance company and not a bank). At the time, various people in the government suggested that in the long run, the taxpayers would make a profit.
Now AIG says it is going to convert the Preferred shares we (the taxpayers) bought into common shares. They can’t afford to pay the 10% interest that the preferred stock requires. That was the whole point – that this would make the “investment” temporary and force AIG to quickly pay off the US Treasury by buying back the preferred stock.
That’s not what AIG is proposing. Like CitiGroup, they want to take the US Treasury from the front of the line to get paid, and put them at the end of the line – so if/when AIG declares bankruptcy the US Treasury is holding only worthless common stock.
The bizarre part of this notion is that AIG thinks converting preferred stock to common stock is -their- decision. That’s not how preferred stock works. The owner of the stock decides when or if they wish to exercise their conversion option, usually based on the common stock getting above the conversion price by enough to justify letting go of the guaranteed interest income stream.
They’re talking like they have a friend inside the US Treasury (Geithner comes to mind) who is agreeable to this. It’s time to say “NO” to AIG.
What is going on here is that most people do no realize their life insurance policies and annuities have no government “insurance” protection.
Insurance company policies are typically guaranteed by a state run Guaranty Fund. The fund has no assets of its own – the only tool it has to stand behind insurance policies is to impose an assessment on the other insurance companies that haven’t failed (making them more likely to fail, also). Unfunded Insurance Guaranty funds are completely unprepared to deal with the largest insurance company in the world failing.
When people realize their insurance policies and annuities are at risk, a “run” can begin on insurance companies as people withdraw the “cash value” of their whole life policies or demand an early termination of their annuity.
This has happened before – in 1933, regulators declared an “insurance holiday” to stop runs on the insurance companies. Here is the story in Time Magazine from April 1933.
Tags: AIG, bankruptcy, Geithner, Paulson