We're all AIG now

Andrew Ross Sorkin delves into something I was thinking about the other day -- at least tangentially -- why would anyone take an insurance policy with AIG at this point? Well, whatever their current prospects for enlisting newly insured, AIG's insurance business -- which was the source of the AAA rating that made their financial products so alluring -- is the reason we're forced to keep the federal money flowing.

“Systemic risk” is a phrase often used to describe the domino effect of one business’s failure on the rest of the economy. We saw the dangers of systemic risk in action when Lehman Brothers failed in September. And we’ve heard a lot from Detroit automobile executives about the systemic risk they say the nation would face should General Motors teeter.

But those failures look like summer thundershowers compared with the financial hurricane that a collapse of A.I.G. would represent, according to the document, which was presented to Treasury Secretary Timothy F. Geithner and Lawrence H. Summers, head of the National Economic Council, in recent weeks.

One of the biggest worries, besides the considerable collateral damage to the banking system, is a risk that most people aren’t talking about, perhaps because it’s too scary. This one is probably easier to understand than any kind of financial chicanery: the dangers lurking below A.I.G.’s seemingly stable, highly regulated life insurance business. In the United States, A.I.G. has more than 375 million policies with a face value of $19 trillion.

If policyholders lost faith in A.I.G. and rushed to cash in their policies all at once, the entire insurance industry could falter.

So it seems the ultimate end of our bailout of the troubled insurer is to make the insurer a lot less troubled.

The company said Monday that it would create a new holding company, called A.I.U. Holdings, and install its domestic and foreign property and casualty insurance businesses there — with more than 44,000 employees and customers in 130 countries.

That company will be run by senior A.I.G. insurance executives, and its name comes from an existing A.I.G. business, American International Underwriters.

But the goal is to break this new property insurer free of A.I.G. and its many complications. “A.I.G.’s conglomerate structure is too complicated, unwieldy and opaque,” said Edward Liddy, who was brought in as chief executive by the government last fall when the conglomerate nearly collapsed. While announcing the details of the latest government package and the company’s fourth-quarter loss of $61 billion, he emphasized that the company does not need cash.