AIG to U.S. Taxpayers: "Your Money or Your Life (Insurance)"

[McCamy Taylor]

How could insurance giant AIG threaten the American people with loss of their life insurance as they appeared to be doing in this memo to the Treasury last month:

http://abcnews.go.com/images/Business/aig_systemic_090309.pdf

When state laws (which regulate the insurance industry) prevent insurance companies from using the capital of their other lines (such as life insurance) to back their mortgage insurance line?

http://faculty.haas.berkeley.edu/JAFFEE/Papers/094lRIO2006.pdf

http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1056&context=iber/fcreue

Answer:

Twenty five articles and three hours of Googling later, I am still trying to answer this question.

Monoline insurers (also referred to as "monoline insurance companies" or simply "monolines") guarantee the timely repayment of bond principal and interest when an issuer defaults. They are so named because they provide services to only one industry. <1>
The economic value of bond insurance to the governmental unit, agency, or company offering bonds is a saving in interest costs reflecting the difference in yield on an insured bond from that on the same bond if uninsured. Insured securities range from municipal bonds and structured finance bonds to collateralized debt obligations (CDOs) domestically and abroad.
Insurance regulations prevent property/casualty insurance companies, life insurance companies, and multiline insurance companies from offering financial guaranty insurance. The monoline industry claims that it has the advantage over multilines of sole focus on capital markets.

http://en.wikipedia.org/wiki/Monoline_insurance

If you look at the corporate structure of AIG and its many different types of insurance offerings, it is clear that the company is as multilinear as you can get.

http://www.reuters.com/finance/stocks/companyProfile?symbol=AIG.N&rpc=66

In light of the massive losses which a mortgage/municipal bond insurer can suffer if there is an economic catastrophe (like a Second Great Depression) or a severe downturn in the housing market or if a city goes bankrupt, these laws were passed to protect consumer’s other insurance policies---you know, their auto, home and especially their life insurance. Companies like AIG were never meant to place ordinary life insurance policy owners in the unpleasant situation of having to agree to a multi-billion dollar bailout in order to protect a personal quarter of a million dollar term life policy.

The states guarantee some of your life insurance, should your company go belly up. Here are the levels of coverage by state.

http://www.annuityadvantage.com/stateguarantee.htm

Note that many people have policies worth more than the maximum payment allowed. In addition, if a state is forced to start paying up on life insurance written by a bankrupt company, customers can expect increased delays and other hassles. And what state has the funds to start forking over a hundred thousand dollars at a time to people who want to cash in their whole life policies? Worse yet, many of the people insured for term life insurance would no longer be able to get another policy with a different company, because they would now be too old or have medical conditions they did not have ten or fifteen years ago. With the aging of America, a threat to cancel everyone’s life insurance by a company like AIG is not something that anyone can take lightly. Indeed, life insurance may be second only to the home as form of American middle class wealth. If the breadwinner dies, the family can count upon life insurance to see them through hard times----that is how it is supposed to be.

So how, with all this regulation in place to keep the insurance industry from risking the nation’s life, home, auto, disability and other insurance, did AIG manage to get itself into a position in which it can claim that insurance as we know it will cease to exist if the company does not get more money to pay off its clients who made unsound investments based upon mortgages which were written fraudulently?

Seems to me that the only thing that would cease to exist is AIG.

However, that has not stopped a flurry of articles which describe why AIG needs to be propped up to protect our life insurance.

http://www.subprimeblogger.com/life-insurance-crisis-could-your-policy-really-disappear/

All this talk of the life insurance crisis is enough to turn your hair gray---even though life insurers are reportedly suffering only minimal losses from the current economic downturn. Why, it is almost as if someone is using the old Bush-Cheney terra tactic in an attempt to scare us into parting with more money that ought to go to universal health acre and improved education.

This did not all happen overnight. A year ago, Gov. Eliot Spitzer testified before the U.S. House about problems with companies like AIG. At the time, he said they either needed to be “recapitalized” or broken apart, so that the risk from the bad policies covering bad mortgaged back securities did not threaten other insurance lines.

http://www.wileyrein.com/publication_newsletters.cfm?id=27&publication_id=13507

Same subject, different source:

http://www.nytimes.com/2008/02/16/opinion/16sat1.html?_r=1

With major bond insurers hobbled by an ill-advised foray into subprime mortgage territory, Mr. Buffett made a tough offer aimed at the biggest and healthiest chunk of their ailing business. The insurers either turned Mr. Buffett down or haven’t responded, which puts the onus on them to devise their own rescue plan. Mr. Spitzer on Thursday gave the insurers five more days to do just that. If they fail, they face a potential breakup by New York State’s insurance regulator.

The financial industry was not amused.

http://strategicinvestor.blogspot.com/2008/02/eliot-spitzer-and-mortgage-insurance.html

In fact, this is the worst possible outcome for bond insurance. It defeats the very CONCEPT of insurance. As we know, insurance is based on the empirical evidence that it is easier to predict outcomes for an entire population than for an individual member of that population. Since the risk (as measured by the standard deviation of the outcome) faced by the individual (early death, dismemberment, etc) is higher than that of the population, it is possible to make money arbitraging the difference. This is called underwriting. Everyone wins.
Furthermore, there is another well-known principle in investing, which is diversification. Diversification of risk tends to reduce the overall risks of a portfolio, even when the risks show some correlation.

Now, I will be the first to admit that I am not a trained investment analyst. However, it seems to me that only the people who deal in worthless bonds win in a situation in which the likelihood that you will not die tomorrow is used to offset the risks associated with toxic mortgages. Because, if they can get companies that are swimming in life insurance and auto insurance and other premiums to write policies securing their worthless pieces of paper, when buyers realize that the paper is worthless and stop buying, these traders in worthless paper will have a deep pocketbook to raid.

By the way, the New York Times reports that AIG will not tell anyone who got our tax payer money ($85 billion last fall, total of $160 billion). I am still waiting to hear if Carlyle Group’s $16.6 billion was one of the debts that Bush arranged to have paid off.

http://www.nytimes.com/2009/03/08/business/08gret.html?_r=3&adxnnl=1&ref=business&adxnnlx=1236502889-+AeFgr9ecukV/IrkscDfoQ

When Congress demanded to know who got the money and how AIG was allowed to get into such a mess, they got the run around.

http://www.nytimes.com/2009/03/06/business/economy/06insure.html?hp

Tens of billions of those dollars have merely passed through A.I.G. to its derivatives trading partners, shielding them from losses. The Fed has refused to provide the names of those financial institutions, and senator after senator, Democrat and Republican, said that was an outrage.
snip
Mr. Kohn said the Fed believed that the only hope of recovering the taxpayers’ money was to get A.I.G. back on its feet, doing business as usual — and that meant respecting its customers’ privacy.

In case you are wondering who in the federal government was supposed to be overseeing AIG, be sure to scroll down to the bottom of the article to learn how their purchase of an itsy-bitsy savings and loan meant that

A.I.G. came under the Office of Thrift Supervision.

Allowing the Bush administration to plead incompetence. Maybe it is just me, but how come the “incompetence” of the previous administration always erred in the favor of the big corporation and GOP donor? If all the insanity was completely random, wouldn’t they have done something right from time to time? I suppose a person could accidentally wander into a bank wearing a ski mask, however, it is statistically impossible to accidentally perform all the steps necessary to rob a bank unless you mean to rob the bank.

I think that the Bush administration meant to rob Americans of their homes. And I think they meant to go after our life, home, disability and other insurance, too, as a way to protect themselves from the inevitable losses that would accompany their criminal investment schemes---

Which raises the point---why isn't AIG in court contesting the mortgage insurance policies it wrote on the grounds that it assumed that it was covering mortgages written in good faith. Could it be that AIG would rather rob the US taxpayer than take on Bank of America?



Note that rival insurance giant, MetLife wants to buy AIG’s life insurance line.

http://www.pbn.com/detail/40571.html

However, if AIG can threaten the U.S. government into giving it billions more every time it wants some money just by saying “You better if you know what is good for your life insurance policies…” then I do not see them selling. Blackmail is too lucrative.

[Triana]

1. AIG = Somali pirates = extortionists...

...no diff IMO - I HATE these people.

[Jambalaya]

17. WalMart and AIG Dead Peasants policies

Wal-Mart Gambled, Lost $1.3B on ‘Dead Peasant’ Policies, Insurers Say
By FRANK REYNOLDS, Andrews Publications Staff Writer

Discount retailing giant Wal-Mart cannot sue its insurers just because it gambled and lost $1.3 billion on getting a tax break from thousands of insurance policies it took out on employees, according to a brief filed by the insurers in the Delaware Supreme Court.

Press reports have dubbed the “corporate-owned life insurance” policies at issue in this litigation “dead-peasant insurance” because most of the policies were purchased by companies that employ large numbers of workers at the lower end of the wage scale and most of the policy benefits went to the companies rather than to families of deceased employees.

The practice was curtailed in the mid-1990s when the federal government, which had previously called the financing scheme “tax arbitrage,” closed the tax loophole and began to pursue Wal-Mart for back taxes.

Meanwhile, outraged employees and their relatives sued.
After the Chancery Court dismissed the suit, Wal-Mart appealed, claiming that the lower court overlooked the duty of the insurers to deal in good faith with their client.

“Wal-Mart’s allegations of misrepresentation fail as they concern non-actionable expressions of opinion of law or future or contingent events not representations of fact,” the insurers say.

Wal-Mart Stores Inc. et al. v. AIG Life Insurance Co. et al., No. 172, answering brief filed (Del. Aug. 12, 2005).
Delaware Corporate Litigation Reporter
Volume 20, Issue 05
09/08/2005_______________________________________________



So, WalMart bought the policies in Delaware,instead-even collecting on policies in cases where the employee had left the employ of WalMart years earlier. WalMart was STILL the benficiary,as ALWAYS however.

As an extra added fillip, the present VP of WalMart,Eduardo Castro-Wright,was named to the BOARD of Directors of Metroplitan Life just last year.
Didn't this thread say that Met Life was looking to buy AIG? Well, that one way to get back billions lost in above lawsuit,isn't it?

And,considering that WalMart is now in the online medical records business,wouldn't that be a match made in heaven...or someplace else,perhaps?]

[jannyk]

2. "A.I.G. came under the Office of Thrift Supervision." !!??!!

... the 'Office of Thrift Supervision'????

:rofl: :rofl: :rofl: :rofl: :rofl: :rofl:

...Now I just have to go google the hell out of that - thanks!!!

[Jack Sprat]

3. Treasury chief will not make AIG accountable

for the taxpayer money they have received. None of us know where they money is being dispersed. I would have fired Geitner before Mardi Gras. He and Bernanke are both protecting the thieves or seem to be doing so. If they get federal money, how can anyone responsible not demand a full disclosure from AIG of where our money is going?

[KharmaTrain]

7. Catch 22

I agree that we need a full accounting of where the AIG money went. How much of it went back into the derivitives games that led to even greater losses while protecting the banks (giving them a back door to more bailout money) and investors. Enough is enough.

However, AIG knew they had Timmeh under the gun. If they collapse, down goes the markets and all the major banks. Geitner has no control over that...this horse was long out of the barn before he came onboard, and he's had to try to pick up the pieces of an absolutely corrupted Treasury. If the banking system tanks, the Treasury is not in any condition to really step in...and Geitner knows it. What's worse is AIG does as well.

Geitner isn't the problem, but he isn't the solution, either. His attempts at creating a "soft" bottom is like treating pneumonia with Nyquil. If a company is "too big to fail", it needs to be nationalized, stabilized, re-organized and its assets sold off. New Deal era banking regulations need to be reinstated and vigorously enforced and the culture of greed and corruption on Wall Street must be fully busted. Geitner isn't cut out for that job.

[Sancho]

4. I've had Valic Annuities for years; AIG bought Valic?

so, is my annuity safe? no one seems to know. In theory, the assets are held by state law (Texas of course) which is not comforting!!

[Belial]

9. Yes.. AIG bought VALIC.. in theory if an insurance company

goes belly up.. all the other insurance companies step in and pay claims, etc for the dead company. This has actually worked better on a state level than on a federal level..

[Sancho]

10. These idiots are talking hundreds of billions for AIG...

pretty scary to think any state could back the debts involved, but I'm not sure rolling money to a different company makes any difference since they all are in trouble.

[Belial]

16. actually they are all not.. You would be suprised..

the older.. less glamorous companies are doing quite well.

[Festivito]

5. BTW, now they're 21st Century Insurance.

They bought the company with the name, and now the car insurance is called 21st.com.

It's not quite Xe, but it's a change.

[D-Lee]

6. Empty threat and bad policy -- tsk-tsk AIG

The insurance lines ARE separately regulated by the state insurance departments. They are separate, period.

Just shows how badly AIG would like to raid its own separate coffers, which have remained protected.

Now, other lines of business were subjected to federal pre-emption (hey, remember how it was thought that the feds were always better at everything? Guess we know now to look under that rock, especially if the rock were the Bush administration!).

At this time, we can see the role and importance of State regulation. You could also look at the state-regulated banks, which I doubt are experiencing the same trouble as the nationally-regulated banks.

The AIG "mortgage insurance" apparently under discussion is part of their financial operation arm (the part that did the credit defaults and bonds, not insurance at all), not part of the AIG which issues actual insurance policies to individuals.

Nice post, McCamy. Thanks!

[Supersedeas]

18. meanwhile at CNBC: pom-poms and powdered faces for the Biz Cheer Chicks

[Froward69]

8. Fuck AIG!

I personally know of an instance where AIG convinced an 80 year old to convert his (paid off) life insurance policy to an "accidental death" policy. AND his long term care policy to another "accidental policy."


Prostate cancer is not an accidental death.

40 years of policy premiums (with interest) down the drain.

Bastards!

[whoopingcrone]

11. Life Insurance is not an "investment"...

It's a bet you are 100% guaranteed to lose.
If you expect someone to collect on your insurance after you've gone,
read your policy now.
And If you expect to collect on someone else's life insurance, read their policy now!
While it may be uncomfortable to ask to see a copy, it's a lot better
than discovering after the fact that
the insurer will get away with refusing to pay, on some technicality...
a common practice.
Also check out the company you/they've insured with's pay-out rate,
especially if it's one of those dollar-a-day whatever-your-age types.

[L0oniX]

12. This is a stick up ...your money or your life = health care insurance companies.

[NashVegas]

13. AIG Knows Where Just About Every Asset Is the World Is Hidden

And that's why they're getting propped.

One of Octafish's posts led to the information, if not come right out and accuse.

But basically there was an unrelated article in LA Times about how the CIA used insurance companies to track down the most important targets to hit during WW2 - basically they infiltrated German insurance companies to find out all kinds of details about Germany's insured assets. I'll repeat what I posted there:

Germany had 45% of the worldwide wholesale insurance industry before the war began and managed to actually expand its business as it conquered continental Europe. As wholesalers, or "reinsurers," these companies covered other insurers against a catastrophic loss that could wipe out a single company. In the process, the wholesaler learned everything about the lives and property they were reinsuring.

...

"This story is incredible because the unit begins as part of the desire of American interests to contribute to the war effort and exploit it for future economic gain," said historian Timothy Naftali, a consultant to the Nazi War Criminals Interagency Working Group that was created by Congress last year.

Starr** had started out selling insurance to Chinese in Shanghai in 1919 and, over the next 50 years, would build what is now American International Group, one of the biggest insurance companies in the world. He was forced to move his operation to New York in 1939, when Japan invaded China.

In the early years of the war, the German insurance industry expanded its business as it conquered continental Europe. Nazi insurance brokers who traveled with combat troops during invasions also scoured local insurance files for strategic data.

German-owned companies were blacklisted by the Allies, but the Insurance Intelligence Unit found that the Nazis did business through countries such as Switzerland and laundered transactions through South American affiliates, particularly in Argentina.

"The blacklist is of no good use because the firms not blacklisted are full of Germans," one of the Insurance Intelligence Unit's reports complained in 1943.

Starr's people and other insurance executives had intimate knowledge of the people involved in the global insurance business, so they were able to track potential collaborators.

http://articles.latimes.com/2000/sep/22/news/mn-25118

** refers to Cornelius Starr, Kenneth Starr's uncle.

Capiche?

[dixiegrrrrl]

14. Damn good writing, that.

Most excellent piecing together of the information.

Thanks....

[Supersedeas]

15. Nice researcher....thank you much for digging into this

[radfringe]

19. Time to call it