RISMEDIA, March 4, 2009-(MCT)-American International Group’s reporting Monday of the largest quarterly loss in U.S. corporate history, and an announcement of yet another government bailout, reignited debate about whether failing financial institutions should be nationalized or simply allowed to sink.
The Treasury Department and the Federal Reserve, moving before markets opened, unveiled a plan to have taxpayers own nearly 78% of AIG and gave it another $30 billion of Wall Street bailout money.
That’s on top of the $40 billion it received in November and its government rescue on Sept. 16. AIG has received more than $162 billion in taxpayer aid in four separate efforts to save the insurer.
Despite all that rescue money, AIG on Monday still posted a $61.7 billion fourth-quarter loss. Most of AIG’s top management is new, brought in after the government rescue, so coming on the heels last week’s revamped bailout of Citigroup (the bank’s third), it raises the question: Is good money being thrown at bad institutions?
Wall Street seemed to think so, falling Monday to 12-year lows. In a dismal start to March trading, the Dow Jones industrial average was down more than 4.2%, falling 299.64 points to 6763.29, the lowest close since April 25, 1997.
As the Dow fell below 7000, the S&P 500 fell below 700 in trading but closed down 4.7%, or 34.27 points, to 700.82, its worst close since Oct. 30, 1996. The Nasdaq fell 54.99 points to 1322.85.
As regulators fire more bullets that don’t fell the financial monster, a growing number of economists, led by New York University’s Nouriel Roubini-nicknamed “Dr. Doom”-are calling for the outright nationalization of big banks to strip out their bad assets and the sale of these institutions back to the private sector.
The rationale of this kind of nationalization, tried successfully in Sweden during the 1990s, is that the money thus far pumped into institutions such as AIG and Citigroup-whose shares are now virtually penny stocks-simply isn’t bringing them back to health.
However, one of the lions of finance came out Monday against nationalization, particularly the Swedish model.
“Their successful approach revolved around a handful of banks, but we have 7,500, as well as many (savings and loans) and credit unions, which would have to be flushed into government hands,” Bill Gross, managing director of PIMCO, the world’s largest bond fund, said in a note to investors on the Newport Beach, Calif., company’s website. “Regulators are overwhelmed as it is.”
In the case of AIG, nationalization has a range of problems. Its troubles are rooted in the financial side of its operations, not in its insurance business. Policyholders are protected, and the government agreed to take two of AIG’s international insurance arms-American International Assurance and American Life Insurance-into a trust. That move seeks to build a protective ring around healthy insurance operations at AIG to prevent further problems from its financial markets operations.
Monday’s rescue revamp, however, gives the government so many convertible preferred shares of AIG that taxpayers could soon own almost 78% of the company. To critics, it means AIG already has been nationalized in all but name.
© 2009, McClatchy-Tribune Information Services.