Already, the U.S. has poured $220 billion into these two global entities, to no avail. Taxpayers now own a 80% of the ailing insurer and a huge chunk of the nation's fifth-largest bank. The orderly removal of toxic assets has failed to arrest the finanical sector's decline. Hindsight is always twenty-twenty, and reveals the strategies of both companies were flawed.
AIG
First, insurer AIG strayed from its core business. From a share price high of $50 just one year ago, AIG is trading at $0.50 today. Instead of sticking to insurance, a regulated business, AIG bet that housing prices would continue to climb – or at the very least, that they would remain stable. AIG in turn could rake in billions of dollars by selling credit default swaps – unregulated securities – without having the funds to back them. When the housing market went south, those swaps came due and AIG was unable to pay. Victims were affected worldwide and the spectre of their failure due to AIG’s problems sent ripples of fear throughout the world, hence the “too big to fail” mantra.
Citibank
Citibank, once the jewel in Sandy Weill’s conglomerate, is on its knees as well. From a 52-week high of $27.35, shares are changing hands at just $1.23. With an infusion of $45 billion, taxpayers now own 36% of the wounded titan. The roots of Citi’s downfall were sown in 1999 and the efforts of its then CEO, Sandy Weill, to repeal the Glass-Steagell Act of 1933 that separated the operations of commercial and investment banks. The change ushered in the era of one-stop financial shopping for banking, brokerage and insurance products. Sears Roebuck and Company tried the same strategy but quickly realized the error of its ways and got back to its core business – retail – and sold off its Allstate insurance unit, Coldwell Banker real estate operations and its Discover Card financial services unit. While Weill reaped a financial windfall and retired, Citibank stayed too long at the party and now taxpayers are paying for the excesses.
Too Big to Succeed
So while management and the government cry “too big to fail” it’s painfully obvious that these entities were too big to succeed. Even with massive bailout funds from the government, there is no clear plan for survival. The total dollar amount of the hole AIGhas dug is unknown and, citing fiduciary responsibilities, AIG won’t release the names of counterparties that the U.S. taxpayer is essentially paying off for AIG.
The Federal Reserve
Federal Reserve Chairman Bernanke told Congress just last week that “We have no structure, legal or regulatory, that allows us to resolve in a safe and sound way, a large, international financial conglomerate. We don't have a good framework for dealing with systematically critical firms.”
So what remains? Organizations that are too big to fail but have no plans for survival, no transparency with respect to balance sheets, asset sales or management strategies. Looks like the only thing U.S. taxpayers can look forward to is more legal financial sleight-of- hand and financial opaqueness. That and falling equity prices of companies deemed too big to fail.
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