Letters: Lessons from the past

US capitalism has been known to be aggressive and fiercely dogmatic but the recent episode of American International Group (AIG) has also exposed its unabashed ingratitude. It has been almost five years since AIG’s stock dropped 60 per cent in a day, leaving the company tottering. The US Treasury rescued it with a $182 billion backup. Hence, the news that the multinational insurance company wants to sue the US government over the bailout shows its short memory. On September 16, 2008, AIG’s share prices had fallen over 95 per cent to just $1.25 from a 52-week high of $70. There was no cash for the next day’s critical trading. The Treasury arranged for a loan of $15 billion overnight, after AIG physically carried share certificates of matching value to the government vault. AIG’s Joseph Cassano, who later became notorious as one of the honchos of the 2008 financial collapse, had systematically entered into credit default swaps to insure $440 billion worth of securities, of which $58 billion were the highly toxic debt from subprime mortgage loans. With AIG’s spread of business, the US government had felt the company’s demise could be “disastrous” and posed a “systemic risk” to the global economy. In a testimony before the Senate Budget Committee in March 2009, the Federal Reserve Chairman Ben Bernanke declared, “AIG exploited a huge gap in the regulatory system and made irresponsible bets and took huge losses.”

 

Today, although AIG might feel it could have negotiated a better deal, the fact is that its board of directors had voluntarily agreed. From a corporate governance perspective, AIG is perhaps being extra cautious. But why was the company board not careful when it brought down not only a huge institution to its knees but also sent violent tremors across to every other major economy? Or, when its honchos struck an exorbitant sponsorship deal with Manchester United? Only the bravest of optimists can conclude that US capitalism has learnt its lessons of 2008.

R Narayanan Ghaziabad

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