Now that we have bailed out significant portions of the real estate, banking, and securities brokerage industries, what’s left? The New York Times provided an interesting glimpse into the bailout of AIG, the world’s largest insurance carrier, which has gone almost unnoticed given the massive $700 billion bailout of the real estate industry.
Basically AIG took an enormous gamble that home values funded by subprime loans would not fall, and made tremendous profits by not having to pony up significant capital against future claims on the insurance it was writing to protect investors of these loans. By highly leveraging this bet, profits would be great if home values continued to increase, but catastrophic if they went down.
While the downside of tightening credit if the real estate bailout does not happen is somewhat difficult to quantify, a failure of AIG or worse yet the entire insurance industry, is absolutely clear. First there are the policyholders, who assume that their lives, health, homes, cars, and businesses are insured against significant losses. Then there are the shareholders, many of whom are institutional investors managing pension funds and mutual funds which are owned by us. Other stakeholders include companies, especially those in the financial services industry, that invest in the stocks and bonds issued by insurance companies. These companies provide jobs and income that keep the economy going.
Now that we’ve seen several large banks and investment banks become insolvent, and one large insurance company, it begs the obvious question. How many more insurance companies can we expect to fail and request a taxpayer bailout?