AIG Has Created a Fantasy World Where Everything Is Fine


As we understood it, the giant rip in insurance company AIG’s balance sheet, the one that caused the U.S. government to lend them a mind-boggling $182 billion, was the result of its financial-products unit gambling too much of the company’s money on derivatives. The rest of the company, the parts that actually dealt in insurance, were functioning fine — or so we have been told. According to the Times today:

But state regulatory filings offer a different picture. They show that A.I.G.’s individual insurance companies have been doing an unusual volume of business with each other for many years — investing in each other’s stocks; borrowing from each other’s investment portfolios; and guaranteeing each other’s insurance policies, even when they have lacked the means to make good. Insurance examiners working for the states have occasionally flagged these activities, to little effect. More ominously, many of A.I.G.’s insurance companies have reduced their own exposure by sending their risks to other companies, often under the same A.I.G. umbrella. Echoing state regulators’ statements, the company said the interdependency of its businesses posed no problem.

It’s like they’re operating in their own little world, like the Sims or Second Life.

It’s like they’re operating in their own little world, like the Sims or Second Life.

Now, ordinarily we don’t have a problem with those kinds of fantasy-world games; we understand that it’s nice for people who have a hard time in the real world to have a place they can go to act like they have bigger boobs or whatever. But the insurance policies AIG is writing with its fantasy money belong to real people! And, frighteningly, according to the Times the state regulators that oversee them are eager for them to write more policies, despite their possibly not having the actual currency to back them up, “because they see it as the best hope of paying back taxpayers.” They sure are going to be in for a surprise when they find out the taxpayers don’t accept Linden dollars.

After Rescue, New Weakness Seen at A.I.G. [NYT]