Wednesday, September 17, 2008

AIG and the Amusement Park

With AIG showing up on the news every night (or every minute on the internet), I've had a few questions come my way along the lines of, "What's going on with AIG? Do I need to switch companies?" The strongest statement I can make is, "I am making no changes to my AIG policy" (which happens to be the biggest policy I've sold for them, both in premium and coverage amount).

As both a policyholder and agent I've been following the situation closely. Every news story and press release has its own bias and angle, but they have a consistent theme. AIG is not broke. They have over a trillion dollars in assets. The problem is that it's not a trillion dollars in cash sitting in a vault. It's in long-term investments, real estate, etc., where they don't have instant access to it. The crisis is a short-term liquidity problem.

Billions and trillions of dollars are difficult for me to grasp, so here's how I'm thinking of it. Hopefully this will help you to. This situation is parallel to me going to an amusement park with my family and $100 cash in my pocket. I'm not planning to spend that much, but want to have it just in case. The first ride, my younger son tells me repeatedly he can't ride the merry-go-round because he'll throw up. I tell him, "That's ridiculous. Nobody get's sick on that little ride". I drag him onto it, and after about a minute he pukes up his breakfast. Then my wife smells his vomit and loses her breakfast too. Luckily my son's wearing an old t-shirt, so instead of trying to clean it up, we throw it away and spend $25 on a new Hawkeye t-shirt at the gift shop that's really only worth $10. Of course now the second son wants a Cyclone t-shirt to make it "fair". I don't want the day to be ruined already, so I avoid the fight and buy it. No problem, I've still got $50 and my ATM and credit cards.

However, an hour later my wife and son are both "starving" because they barfed breakfast. So we go to the hot dog stand. Hot dogs are $5 and pop is $4. Even though the price is ridiculous, I bite the bullet to keep the peace. I think that maybe I should use my credit card, but the cashier tells me it's a $50 minimum for credit card purchase. Do I spend $18 of my cash, or spend another $32 so I can use my card. Either way stinks. I figure I'm better off spending the cash and just not being extravagant the rest of the day. I've got $32 and 8 hours left in the park. I should be fine.

Six hours later, everything has been a blast. We've played a few games, had a few snacks, and my cash is gone. But I can get by another 2 hours. If they get hungry, I can stall a couple of hours by promising that I'll take them to McDonald's across the street on the way out. No big deal.

But an hour later we go by the ice cream stand and both kids start screaming for ice cream. They're hot and tired, and it sounds pretty good to me too. I tell them I'll go to the ATM and get some cash, even though I know the ATM has a $10 charge since it's not my bank. They get in line while I go to the ATM. But when I get there, the ATM is down. Out of cash. There's a couple grand in my checking account, but no way to get it. What do I do? Other than asking strangers for a handout (the ice cream stand doesn't take credit cards), my only other option is to pull them out of the ice cream line and head to the parking lot. I just keep my head down and avoid the stares of the people watching me drag the crying kids out trailed by my angry wife. I'm a really great guy, but I sure don't look like it to the other people in the park. It stinks, but we'll survive.

And then the straw that breaks the camel's back. We get the truck and head to the gate. Parking is $8 ($1 per hour--didn't think it was that expensive at 9:00 this morning). Cash only, no checks or plastic. The attendant thinks he's a U.S. Marshall and won't let me out without paying. I scrounge the floor, ashtray, bottom of my wife's purse and come up with $4.72 in change. Not good enough for Johnny Law. The 20 cars behind me are honking, kids are screaming, mosquitos are biting, and now I have to pee. I'm on the verge of a meltdown because I can't come up with $3.28 at that moment. The only thing that's going to save me is if someone behind me comes up and gives or loans me a few dollars to get me the heck out of the parking lot.

That's where AIG is at, on a global scale. The $85 billion loan should get them through the short term problem and back on the right track. In retrospect, there are plenty of ways they could have avoided this problem, just as I could have started out with more cash, not forced my son onto the merry-go-round, rinsed his old shirt out instead of buying new ones, drank from the water fountain instead of buying pop, and so on. I learned a lot of lessons and won't make those mistakes again. I just need a little help to get out of the parking lot and back on the road home. I'm having an acute financial crisis right now, but I'm confident I can pay my mortgage and light bill, just as I'm confident AIG can pay anything it needs to on my policy.