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Will AIG Need More Taxpayer Money?

LINDA WERTHEIMER, host:

This is MORNING EDITION from NPR News. I'm Linda Wertheimer.

STEVE INSKEEP, host:

And I'm Steve Inskeep. One question now facing the US government, not to mention the public, is whether four bailouts of AIG will be enough. The US government has decided again to prop up the insurance giant. AIG got into huge trouble as the world's biggest seller of credit default swaps. It ensured investors against defaults on bonds and mortgage back securities they held, so they were stuck holding the bag when some of those investments went bad. The question is whether an additional $30 billion on top of $150 billion already committed will be enough to save one company. NPR's John Ydstie reports.

JOHN YDSTIE: Yesterday, AIG reported that during the fourth quarter of last year, it lost nearly $62 billion - the biggest loss in corporate history. Unfortunately, US taxpayers own almost 80 percent of the company, and yesterday the government eased the terms of its loans to AIG while deepening its equity stake. The relationship began back in September when the treasury and the Federal Reserve rescued AIG because of fears that its collapse would bring down the global financial system. Yesterday, White House spokesman Robert Gibbs defended the additional aid on the same grounds. But Phillip Phan, vice dean and professor of management at the Johns Hopkins Carey Business School says the government has mishandled the situation.

Professor PHILLIP PHAN (Vice Dean and Professor of Management, Johns Hopkins Carey Business School): The very actions of the government is actually contributing, in my opinion, to sort of a lengthening of this very painful process which, you know, could easily have been taken care of, you know, a year go.

YDSTIE: Professor Phan argues that the US government should have forced the bankruptcy of AIG, brought all of its lenders, counterparties and stakeholders to the table, and made them accept some fraction of the money they were owed. He's not convinced the effect on world credit markets and the economy would have been any worse than what's unfolded over the past couple of months. But he says as long as the government continues to write checks, none of those stakeholders will be willing to negotiate.

Prof. PHAN: So, if I was inclined to say, all right, you know, you owe me a dollar. I'll take $.50 on that dollar and let's just call it day - there is no incentive for them to do that now. The incentive is to wait for the next check or the next guarantee, if you will.

YDSTIE: But Donn Vickery of Gradient Analytics, an independent research provider, says forcing AIG into bankruptcy would have been a big mistake.

Mr. DONN VICKERY (Co-founder, Gradient Analytics): If AIG goes under, I think it would take a number of other banks under with them.

YDSTIE: Vickery, who's been following AIG closely for more than a year, says the insurance giant is simply too intertwined in the financial system through its credit default swaps.

Mr. VICKERY: You can think of it almost as a game of musical chairs. You know, right now, everybody is relatively well hedged in terms of credit default swaps, except for AIG, which didn't hedge their exposure. If AIG goes under, that lack of hedging or that exposure passes on to the next party.

YDSTIE: Essentially, AIG pulls the chair out from under one player, who pulls the chair out from under another. Actually, it's more like dominos knocking each other down than musical chairs. And Vickery says Professor Phan's idea of getting everyone together to agree to take their losses is in impractical.

Mr. VICKERY: It's very difficult to do because of the, you know, the long chain of IOUs that are involved. I mean, to unwind one position, while it may sound easy, it's difficult because that involves adjustments all the way through that chain of IOUs.

YDSTIE: The other issue is that some of the credit default swap contracts that AIG owns will settle without losses given enough time, as contracts expire or AIG chooses not to renew them. Already, Vickery says, the company's exposure in the CDS market has been reduced from $600 billion to $300 billion. And the revised government rescue plan will help give AIG time to reduce that exposure even more. The easier terms in the revised deal do raise the risk of greater losses for taxpayers, says Vickery, but they lower the risk that AIG will go bankrupt can cripple the financial system.

Mr. VICKERY: It's about the best we can do in the circumstances, though we are taking on more risk in terms of not getting our money back from AIG.

YDSTIE: Vickery does agree with Professor Phan that AIG will, unfortunately, require even more aid before it's over. He believes the government's obligations are likely to peak at $250 billion. He does believe taxpayers will get some of that back, but he says they'll be lucky if the final cost is under $100 billion.

Just for comparison, the cost of dealing with 750 failed savings and loans during the S and L crisis was around $150 billion.

John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

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John Ydstie has covered the economy, Wall Street, and the Federal Reserve at NPR for nearly three decades. Over the years, NPR has also employed Ydstie's reporting skills to cover major stories like the aftermath of Sept. 11, Hurricane Katrina, the Jack Abramoff lobbying scandal, and the implementation of the Affordable Care Act. He was a lead reporter in NPR's coverage of the global financial crisis and the Great Recession, as well as the network's coverage of President Trump's economic policies. Ydstie has also been a guest host on the NPR news programs Morning Edition, All Things Considered, and Weekend Edition. Ydstie stepped back from full-time reporting in late 2018, but plans to continue to contribute to NPR through part-time assignments and work on special projects.