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Small thoughts, from the little people
It's a little scary that the world's largest insurance company hasn't planned for a rainy day.
Posted by Tyler Cowen on September 16, 2008 at 12:05 PM in Current Affairs | Permalink
Comments
As one of the little people, that thought did cross my mind. But you aren't one of us, you are a highly influential opinion maker. As such, your recent reticence to forthrightly express your opinion is as scary if not scarier. (Not meant as a criticism just an observation.)
Posted by: RW Rogers at Sep 16, 2008 12:18:48 PM
He's just covering his ass because he, like everyone else, doesn't know shit.
Posted by: s weynard miller at Sep 16, 2008 12:26:23 PM
I dunno why AIG is in so much trouble. Elliot Spitzer himself went through all that trouble to get their management changed to help the stock-holders.
Posted by: Xmas at Sep 16, 2008 12:50:14 PM
The other issue, of course, is that his views are slightly (emphasis on slightly) complicit in how this situation arises.
It's hard to run around proclaiming that the market corrects for everything and beat the deregulation rah-rah drum at times like these.
Posted by: ohnopirates at Sep 16, 2008 1:06:35 PM
"New York Gov. David Paterson said Tuesday that American International Group Inc. (AIG) has just “a day” to raise capital to keep the giant insurer afloat. “I think they have a day, but I think that this is the moment - we’re in the moment right now as to whether or not they can put something together,” Paterson said on CNBC. "
-- Patterson didn't say how rainy that day would be.
http://blogs.wsj.com/wallstreetcrisis/2008/09/16/ny-governor-aig-has-a-day/?mod=rss_WSJBlog?mod=newstracker
Posted by: ZBicyclist at Sep 16, 2008 1:45:35 PM
I had this thought too, but with banks. How the hell did banks not put money away for a rainy day? Don't they go to schools and teach them about putting money away into savings accounts for rainy days?
Posted by: Kent at Sep 16, 2008 2:21:04 PM
Is that a quote from someone? If it is, please give the source.
Anyway, as with Kent, I had a similar thought about the insurance companies after 9/11, when their whole
attitude was, "Oh, gee, we can't possibly be expected to come through when really, you know, unexpected
stuff comes along..." It's not like that's why people buy insurance or anything.
Posted by: Person at Sep 16, 2008 3:12:49 PM
The problem is that the insurance and banking industries don't live by their own principles. There's a reason why Berkshire Hathaway is one of the only companies in those sectors that rose yesterday, despite being huge in both insurance as well as finance- it's owned by a man who actually follows his own advice. Most financial executives are eager to maximize their profits and bonuses as much as possible, sustainability be damned.
It's the Borders question: is it better to make modest, consistent profits doing what you do well, or branch out, capitalize on the excess demand but ultimately abandon the principles that made you successful in the first place? Wall St. has chosen the latter consistently (as do most companies); such systemic downturns are merely the byproduct of a philosophy that constantly values the short term over the long view.
Posted by: SpottieOttieDopaliscious at Sep 16, 2008 3:48:06 PM
No one that I know of ever said that market corrections are not painful. In fact, every economics and finance course I have ever had emphasized that the market is totally unforgiving. The point is that market economies fare better overall than planned economies in the long run. Bad companies fail (and the investors loose their shirts) while well run companies survive and grow. And their investors profit. Unless, of course, paternalistic, social equality government types confiscate the profit of the surviving companies and their investors and give it to those that have failed to prepare for their future. This process has several names: highly progressive income tax; alternative minimum tax; windfall profits tax; capital gains tax. Just to name a few.
Posted by: Butch at Sep 16, 2008 3:48:15 PM
AIG is not really an insurance company and hasn't been one in quite some time. It has a long history of management corruption, a terrible corporate culture that rewarded untruth . . . Spitzer just cleaned that wound. But the underlying bad decisions, short-term profits over safety, and habits of corner-cutting - if not outright falsehood - remained.
Posted by: formeraigemployee at Sep 16, 2008 5:27:49 PM
my muse is Alanis Morrisette - Isn't it ironic? Don't U think? :).
Posted by: Mr. Beefy at Sep 16, 2008 7:58:42 PM
Butch, the idea of taxes seem to offend your libertarian sensibilities - why no anger at the government's policy of repeatedly bailing out failed financial institutions (and NOT wiping out any of their shareholders)? That clearly undermines your thesis that under capitalism "bad companies fail (and their investors lose their shirts), while well-run companies survive and grow". And this from a government that takes every opportunity to malign government involvement in the economy - until the wealthy are about to lose their shirts. I sure as hell didn't want to have AIG's crappy assets crammed down my throat - but that's what the Bush administration has done - and it will inevitably mean I'll be paying higher taxes soon (no matter who wins) to pay for the privilege of buying their piles of crap.
Posted by: bcw210 at Sep 16, 2008 11:03:15 PM
The world's largest insurer?
Allianz is a larger insurer than AIG, both in terms of assets and market cap (even before today). Its shares lost a mere 2% today.
9/11 did not lead to bankruptcy of the main re-insurers Munich Re and Swiss Re. There was just an argument over how much they would have to dole out. They have a fiduciary duty to both shareholders and their other insurance holders to not pay more than they have to.
Posted by: Martin S at Sep 16, 2008 11:14:07 PM
Exactly my thoughts...
Posted by: Kris at Sep 16, 2008 11:17:41 PM
"It's hard to run around proclaiming that the market corrects for everything and beat the deregulation rah-rah drum at times like these."
Actually, it's quite easy. First, you ask why, for example, Berkshire should be punished for doing things the right way by the government propping up their competition and subsidizing how that competition does business. You wonder why, for example, you should be punished for not taking out an excessive mortgage, or leveraging up chasing alpha.
Next, you realize that the only rationale for the bailouts is fear. You ask yourself to what extent do previous regulations set up an environment where companies can get huge to the point where everyone is terrified that if they go out of business. Size matters, and a real free market likes it small.
You wonder to yourself what regulations we have already that hasn't stopped a damn thing this decade. Then, you shrug, say to yourself "I don't need to be an expert in regulation or an expert in failure, that's the lefties job" you buy some Berkshire stock and get on with your specialty.
Posted by: Andrew at Sep 17, 2008 4:35:24 AM
I assumed, casually, that AIG would have negotiated a good deal of re-insuarance cover against systematic risk (simultaneous or near simultaneous defaults) on its massive CDS exposure. Or maybe they tried and did not like the terms tha they were offered , just as they did not like the takeover terms they were offered?
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Posted by: aion kina at Mar 18, 2009 2:29:09 AM
it is not strange
Posted by: tom at May 14, 2009 10:05:03 PM
Is it realistic?
Posted by: kyle at May 14, 2009 10:06:02 PM
a lot of people are hurt
Posted by: kyle at May 14, 2009 10:07:10 PM
