Do Taxpayers a Favor: Break Up AIG

AIG's plan to exit from bankruptcy intact is a bad idea. The government should instead break it up and sell off the pieces.

The American International Group has announced a plan to exit from bankruptcy.  It’s a bad idea. Rather than allowing AIG to continue as a mostly intact entity—as its management wants to do—government agencies that have helped to bail out AIG should instead sell it off in pieces.  Quite simply, the current plan seems unlikely to work, AIG may well be worth more in pieces than it is whole and, even if it is not, the companies’ continued existence would serve to destabilize the insurance market as a whole.

Some background first: under a plan first reported on in the Wall Street Journal, the Treasury Department would convert its AIG stock (currently worth about $47 billion) into preferred stock and increase its ownership share from around slightly less than 80 percent to more than 90 percent. The government-owned shares would then be gradually sold off and, ideally, produce enough revenue to repay the $169 billion the company still owes to taxpayers.

As nice as this may sound, it cannot work. The insurance sector of the U.S. economy has shrunk for several years running and the companies that have done well have, in many cases, succeeded precisely by taking market share from the ailing AIG. Building the company back is nearly impossible particularly since the company sold crown jewels like respected commercial insurer HSB Group soon after it took a swoon. Even if a fortuitous combination of a 1990s-style bull market plus a top-notch AIG management managed to double the company’s stock price every year for three years running, Treasury still would not make back the taxpayer money in the company. Thus, judged by the standard of getting taxpayer money back, the plan isn’t much good.

In any case, there’s ample evidence that the company still has some decent pieces that could produce more than a stock sale. AIG, at its height, had 71 U.S. based operating subsidiaries, hundreds more around the world and roughly fifty brands. (State Farm, roughly the same size as AIG is now, has twelve subsidiaries and one brand.) While some of these are damaged goods, many are worth a good deal. A sale of subsidiary AIA, which AIG’s management torpedoed by refusing to budge on price, would have probably brought in more than $30 billion if allowed to go through.  Another subsidiary, Alico, may be worth as much as $40 billion. Smaller companies provide completion bonds to movies and writing extended warrantees for cars might also be worth something sold alone. Whatever happens, however, the total value of AIG in pieces is certainly more than the $40 billion or so that Treasury’s stock is currently worth.

But even if Treasury could somehow prove that a stock sale could make more than a simple breakup, there’s another good reason for getting AIG: the company’s very structure tends to destabilize the insurance market.  As I’ve written about previously AIG grew big by engaging in decidedly scummy (although rarely illegal) business practices. On one hand, the company’s complex structure made it difficult for insurance regulators, all of them state-level officials, to stop it from engaging in the type of high risk investments that are mostly off-limits to insurers.  On the other, its profusion of subsidiaries and brands made it easy for the company to take cruel, hardnosed and sometimes illegal actions towards policyholders without suffering the reputational damage that other companies’ fear. This combination destabilized—and continues to destabilize—the entire insurance market. If AIG were a profitable private company, such destabilization might be seen as an inevitable consequence of a competitive economy. But as a company that has already cost taxpayers billions, there’s no reason to let it continue. AIG needs to die.