Pull the Plug on AIG

Shares of the insurance company AIG fell 15 percent yesterday on a report that the company didn’t have the resources necessary to pay its likely claims. The government should call in its loans, break up the company, sell its holdings, and put AIG out of business once and for all.

Shares of the taxpayer ward insurance company AIG fell 15 percent yesterday on an analyst report that the company didn’t have the resources necessary to pay its likely claims in several lines of business.

The news should distress many people beyond the ranks of AIG’s own stockholders. In fact, it provides a strong reason that the government should pull the plug on the company. Some background: because a policy that an insurer can’t pay claims on is worthless, laws in all states require insurers to charge prices and keep reserves sufficient to pay claims. Both before and after its government bailout, competitors accused AIG of under-pricing them by skimping on purchases of reinsurance (insurance for insurance companies), making risky investments generally off-limits to insurers, and taking a hardnosed attitude towards claims payments. While the allegations had a grain of truth, investigations from the Government Accountability Office, National Association of Insurance Commissioners and Pennsylvania Department of Insurance all cleared AIG of lawbreaking.

Now AIG’s apparent lack of adequate reserves and reinsurance to pay its claims could put it in violation of many state laws. These violations, furthermore, do damage far beyond AIG’s own customer base. If more of the companies’ businesses collapse, state taxpayers could be left holding the bag and dumping billions more into the company’s rat hole.  (All states have guarantee funds that pay a portion of claims made against insolvent insurers.)

Were AIG a wholly private company, a lengthy, thorough investigation would be in order. As an 80-percent government owned company, however, even the specter of illegal behavior doesn’t deserve toleration. AIG’s continued existence seems likely to destabilize the insurance market and the economy as a whole. The Fed, Treasury, and Congress need to come together and end the farce that AIG has become. The government should call in its loans, break up the company, sell its holdings, and put AIG out of business once and for all.