WASHINGTON — American International Group's reporting Monday of the largest quarterly loss in U.S. corporate history, and an announcement of yet another government bailout, reignited debate about whether failing financial institutions should be nationalized or simply allowed to sink.
The Treasury Department and the Federal Reserve, moving before markets opened, unveiled a plan to have taxpayers own nearly 78 percent of AIG and gave it another $30 billion of Wall Street bailout money.
That's on top of the $40 billion it received in November and its government rescue on Sept. 16. AIG has received more than $162 billion in taxpayer aid in four separate efforts to save the insurer.
With all that rescue money, AIG on Monday still posted a $61.7 billion fourth-quarter loss. Most of AIG's top management is new, brought in after the government rescue, so coming on the heels last week's revamped bailout of Citigroup, the bank's third, it raises the question: Is good money being thrown at bad institutions?
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Wall Street seemed to think so, falling Monday to 12-year lows. In a dismal start to March trading, the Dow Jones Industrial Average was down more than 4.2 percent, falling 299.64 points to 6763.29, the lowest close since April 25, 1997.
As the Dow fell below 7000, the S&P 500 fell below 700 in trading but closed down 4.7 percent, or 34.27 points, to 700.82, its worst close since Oct. 30, 1996. The Nasdaq fell 54.99 points to 1322.85.
As regulators fire more bullets that don't fell the financial monster, a growing number of economists, led by New York University's Nouriel Roubini — nicknamed "Dr. Doom" — are calling for the outright nationalization of big banks to strip out their bad assets and the sale of these institutions back to the private sector.
The rationale of this kind of nationalization, tried successfully in Sweden during the 1990s, is that the money thus far pumped into institutions such as AIG and Citigroup, whose shares are now virtually penny stocks, simply isn't bringing them back to health.
However, one of the lions of finance came out Monday against nationalization, particularly the Swedish model.
"Their successful approach revolved around a handful of banks, but we have 7,500, as well as many (savings and loans) and credit unions, which would have to be flushed into government hands," Bill Gross, managing director of PIMCO, the world's largest bond fund, said in a note to investors on the Newport Beach, Calif., company's Web site. "Regulators are overwhelmed as it is."
In the case of AIG, nationalization has a range of problems. Its troubles are rooted in the financial side of its operations, not in its insurance business. Policyholders are protected, and the government agreed to take two of AIG's international insurance arms — American International Assurance and American Life Insurance — into a trust. That move seeks to build a protective ring around healthy insurance operations at AIG to prevent further problems from its financial markets operations.
Monday's rescue revamp, however, gives the government so many convertible preferred shares of AIG that taxpayers could soon own almost 78 percent of the company. To critics, it means AIG already has been nationalized in all but name.
"It's a cowardly nationalization. It's a hideous and corrupted nationalization," said Christopher Whalen, managing director of Institutional Risk Analytics, which analyzes and rates banks and their risk management.
AIG should be allowed to enter bankruptcy, he said, because state insurance agencies could easily oversee the breakup of the insurance operation while the financial arms that are producing such steep losses could be liquidated.
White House spokesman Robert Gibbs defended the decision to pump more taxpayer money into AIG.
"The Treasury Department and others felt that the systemic risk of doing nothing was simply unacceptable," Gibbs said. "Today's actions further continue allowing the process of orderly — the orderly restructuring of AIG."
Although few analysts cheered the government's action, many think it's the least-worst option for now.
"I think in the case of AIG and Citi, they are just too big to fail. There are too many links to the international financial system," said Mark Zandi, the chief economist at Moody's Economy.com, in West Chester, Pa.
If they let AIG fail, regulators risk "Lehman Brothers on steroids," Zandi said, referring to the financial turmoil that followed September's bankruptcy of a global investment bank.
"If you save them you are saving yourself. That is the logic," he said.
AIG was the largest underwriter of credit-default swaps, the complex insurance-like instruments that allowed investors to bet on the potential default on all kinds of bonds, especially the mortgage bonds whose collateral is pools of U.S. mortgages and commercial properties.
The fourth-quarter results include $7.2 billion in unrealized losses and credit valuation adjustments at AIG Financial Products. AIG is thought to have reduced its credit-default swap exposure from $500 billion to $300 billion.
In rescuing AIG, however, the government has really rescued the people on the other end of trillions of dollars in bets in the unregulated swaps markets.
It's not clear exactly who's on the other side of AIG, although it's widely thought to be investment banks such as Goldman Sachs and other big institutional investors, as well as global banks in Europe and elsewhere.
Monday's joint statement from Treasury and the Fed hinted at that in explaining another move to keep AIG afloat, noting that it operates in 130 countries.
"Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high," the government said. "AIG provides insurance protection to more than 100,000 entities, including small businesses, municipalities, 401(k) plans, and Fortune 500 companies who together employ over 100 million Americans."
(Greg Gordon contributed to this article.)
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