Keep On Top Of News If You Have An Insurance Policy With AIG

The Federal Reserve lent the soon-to-be-former-Dow-component AIG (AIG) $85 billion. In exchange, the company must sell off its assets to pay back the loan. The interest rate is LIBOR plus 8.5%, which is equivalent to the terms of many credit cards.

Many of the company’s insurance units are profitable, and there is some scuttlebutt that this could end up being a profitable move for the Fed. The Fed is clearly cherry-picking which companies it saves and which it lets fail. We can only assume that there was something in American International Group’s mortgage-back securities exposure that would have caused a financial tsunami if the firm were allowed to fail. If that was truly the case, then this deal is a huge positive for investors.

The problem, however, is that every time the government bails out a company, it becomes that much harder to justify not saving another company. Capitalism works by punishing those who make mistakes. The Fed is on a slippery slope, and we won’t know for many years whether last night’s action was the right move or not.

The terms of the AIG deal may cause other companies to think twice about asking for government handouts. AIG’s management has been fired. The interest rates are high. The company will be broken up and shareholders will not benefit. Should any other bailouts be needed, let’s hope the terms of the next deal will be as tough, if not tougher.

If you have an insurance policy through AIG, call BOTH your agent and your state insurance regulators. Initial news reports say the policies should be safe, but do your homework and pay attention to the news. If you have a claim that is being processed, be very proactive about staying on top of its progress.

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