On Monday, I was working on the Port of New Orleans lawsuit against Factory Mutual, when it dawned on me that the Port’s current property program was underwritten by Lexington Insurance Company. I wondered how many large corporate risk managers were calling their brokers concerned that a possible bankruptcy by AIG would affect an entire range of corporate risk management. Tuesday brought even more concern. I received messages from annuity brokers, including one that I have not heard from in eight years, telling me that the settlements of lawsuits which were funded by long term annuities probably were not in jeopardy and that we had acted "reasonably" by placing those settlement funds in AAA rated insurance companies which were subsidiaries of AIG. I did not like the tone of those emails because they implied that former clients may bring suit against me if the AIG collapse effected those annuities.
Later, news reports indicated that New York changed its regulations to allow AIG insurance subsidiaries to provide loans from surplus to help keep the parent AIG solvent. It seemed that the AIG insurance companies were simply bailing out an immediate liquidity problem caused by the paper write-down of assets. This was extraordinary and, while life goes on, there are going to be huge ramifications for corporations and individuals if AIG fails; that company effects everybody. I thought about AIG’s claims handling practices in the late 1980’s and early 1990’s. When Hank Greenburg was then running AIG, we referred to AIG’s claims payment culture as similar to Gallo wine: "We pay no claim, until its time." It took forever and a day, with the worst excuses in the world, to get checks from AIG. Greenburg understood how to play the float.
Nevertheless, the government loan was a good thing. An orderly and fair wind-down of AIG business prevents panic and protects everybody. A lot of policyholders are breathing a sigh of relief. I am a firm believer in the free market. A government should be in the business of governing and not running a business. Government and business are separate in a democracy for a number of reasons.
However, what has happened in the last two weeks shows why financial institutions need regulations regarding their conduct. People and policyholders need certainty that their savings and financial nest eggs are safe. We lost an understanding of the reasons why regulations of banks and insurance companies were set up long ago. Lobbyists for banks and insurance companies successfully lessened regulatory safeguards that had been in place for years. Over the past decade, in the march for greater profits, insurance companies and banks sought and obtained much more freedom in their financial affairs.. The problem is that in finance, greater rewards of profit generally come with greater risk of failure. We are reminded of those lessons today.
