Dean Baker’s piece “The GM Bailout Makes the Most of a Bad Situation”  is irresponsibly misinformed, Letter to the Editor, POLITICO by Lucas van Praag

American International Group is, and was, one of the largest insurance companies in the world. As part of our ordinary course of business, we insured some of the risk we had assumed on behalf of our clients with AIG. Our contracts included the obligation on AIG’s part to provide us with cash collateral in the event that the underlying value of the assets it was insuring for us declined.

When asset values began to decline, AIG regularly disputed the amount of collateral it was required to provide. In response, we spent over $100 million to buy additional insurance from other major financial institutions in order to hedge our exposure to AIG and minimize the risk to which our shareholders were exposed. As a result of what most people would think of as prudent risk management, we had no direct economic exposure to AIG and would not have suffered a loss if AIG had collapsed.

Baker asserts that we were guilty of bad business judgment by entering into agreements with a company that was not able to make good on its commitments. He may not be aware that at the time we bought insurance from AIG, it was one of the strongest companies in its field. However, he inexplicably ignores the fact that AIG had a legal obligation to honor its contracts to us and to hundreds of thousands of others. If it had failed to do so, it would have been in default and would likely have collapsed.

As senior government officials have testified, they decided that the default of AIG would result in systemic problems with potentially catastrophic consequences, and so they stepped in to bail out the company. This, arguably, prevented millions of insurance policies held by individuals, corporations, municipalities and governments from becoming worthless and avoided wiping out the life savings of a very large number of people.

The fact that the government acted to prevent the failure of AIG meant that, by definition, the company was able to meet its obligations when they came due.

Baker’s explanation of AIG’s payments to Goldman Sachs is seriously flawed. To give just one example: Of the $12.9 billion that AIG paid us, $4.8 billion was related to securities lending. We had lent AIG $4.8 billion and, as collateral, it had given us high-quality, liquid securities. When the company repaid the loan, we gave it back the securities. If AIG hadn’t repaid us, we would have simply sold the securities and recovered the money we were owed.

It is a pity that Baker did not take the trouble to find out the facts. As a result, your readers have been done a disservice, and Baker has added to the general confusion on this important subject.

Lucas van Praag
Managing Director, Goldman, Sachs & Co.