Well, the spiral I’ve worried about in the finance system for almost a decade is here. AIG is now the next failure on the horizon. They’re one that really worries me.
I’d mentioned on my old blog that there’s a bigger financial problem out there, lurking. Derivatives trade. Shady financial instruments used to rapidly expand credit markets back in the 90’s, and these financial devices did nothing but expand during this decade. One thing I know, insurance companies used them heavily. Hence why I worry more about AIG.
I can’t get into the full details of how derivatives work. Too complex and you need to do a lot of reading to understand them fully.
Here’s what I do know right now. AIG’s issues are another “tip of the iceberg.” Their problems will roll to other companies. What do I mean?
AIG insures many items. You know those cool service plans you get at some companies. The extended warranties on items? Yeah, AIG offers many of those plans for the companies you deal with. If they were to fail, what would happen to those plans? Gone. And who would you blame? Not AIG. You’d blame the place that offered you the extended warranty, not the insurance provider.
Yes, if they do fail it will ripple out to many business we all deal with on a regular basis. And you won’t be cross with AIG. You’ll be cross with your local business.
So, the government now has a 79% stake in AIG? We’re not going to let them fail? The government’s finger prints are all over Freddie and Fannie too, and that’s gone sour, don’t you think?
Bottom line. Some businesses need to fail. When they fail resources are reallocated to better businesses. Our money stops being wasted on bad ideas or poorly managed companies. It gets reallocated to places with real business plans, real product, and true earnings. After Enron failed their little games stopped hurting us as a country, right? So, why carry the water for these other organizations? Just Good Money after Bad Money. Not the direction we need to head in.