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Thursday, February 29, 2024

America’s Insurance Giant

More on AIG, an excerpt from David Merkel’s article on The Aleph Blog.

AIG: America’s Insurance Giant

Excerpt:  "How Much Can the US Government Guarantee? For now, whatever they want, or so it seems.  Perhaps the new question should be what dodgy assets can the Federal Reserve cram into the monetary base?

I’m talking about AIG, and this is one place where only the Fed could have acted, aside from the State of New York (too small).  The Fed can act because in a crisis, they can lend to anyone on a collateralized basis.  Essentially, they took most of the company as collateral for the loan with 80% ownership if things go right.  If things go wrong it will only increase our monetary inflation.  (Note: regulators typically take over financial companies, and though AIG is a holding company with many insurers domiciled in NY, most of the company is not regulated by the State of New York.  The Treasury could not act, and the State of New York did its best, but it was not enough.)

Consider some of the good articles posted on the deal:

I find it amusing that the former CEO of Allstate, Ed Liddy, is the new CEO.  Allstate, for all its complexity, is a matchbox car compared to AIG’s non-functional Maserati.  That said, I like the pick.  He will simplify, simplify, simplify.  He will also have the time to do it.  (And, if he found getting Allstate’s stock price up to be a challenge, so he said to me once, oh my, here is the challenge of a lifetime.)  I also find it amusing because AIG often did not think much of Allstate…

…What can I say?  The financial companies that have failed had liquid liabilities and illiquid assets.  The first job of risk control is to assure sufficient liquidity under 99.5% of all scenarios.  This was not true of Fannie, Freddie, Merrill, Bear, Lehman, AIG, Countrywide, etc.  LIquidity costs money, which is why short-sighted managements intent on current earnings scrimp on liquidity.  But liquidity is the lifeblood of business, far more so than earnings.

Remember this when you invest, and look for companies that provide for significant adverse deviation.  And, all this said, I worry for our republic.  Our liberties are slowly disappearing before us, in a haze of government rescues."

Full article here.

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