AIG: Bailout, Then Breakup?

In the latest phase of AIG's (NYSE: AIG  ) apparently ongoing bailout -- we're now on round four -- the government will take a significant interest in two of AIG's crown jewels (American Life Insurance Co. and American International Assurance), while providing a $30 billion equity line. Since the government already owns a controlling stake in the parent company, this action raises the possibility that the 90-year-old insurer will ultimately be broken up.

As we inch toward a conclusion of this fiasco, there's an important lesson here for investors: Beware of empire-builders. Former CEO Hank Greenberg assembled AIG with nearly the same appetite for dealmaking as Sandy Weill at Commercial Credit/ Primerica/Travelers Group ... Citigroup (NYSE: C  ) . We're now witnessing these unwieldy enterprises unravel; the idea of the financial behemoth is dead. Apparently, simply parroting "cross-selling" over and over isn't the answer to every problem.

Hitting the (business) history books
Didn't we learn anything from the adventures of Harold Geneen, the rapacious former CEO of ITT? In the 1960s, riding the wave of investor enthusiasm for conglomerates, Geneen bought more than 350 companies, including Avis Rent-a-Car, Sheraton hotels, Continental Baking, and The Hartford (now Hartford Financial Services Group (NYSE: HIG  ) ). In 1995, ITT was finally broken up into three publicly traded companies, after a run of scandals and disappointing results.

It is now clear that the main benefit of AIG and Citigroup's gargantuan scale and tentacular reach was simply an implicit government guarantee, which allowed these firms to obtain a funding advantage – the same model that served Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) so well. The government (i.e. us taxpayers) is now making good on that guarantee, in full.

GE: Are you watching this movie?
Who else should be gleaning lessons from AIG? Although General Electric (NYSE: GE  ) wasn't built on the promise of cross-selling, the insurer's example (not to mention those of Citigroup and Bank of America (NYSE: BAC  ) ) should give GE management the push it needs to carefully examine the idea of breaking itself up.

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Fool contributor Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 02, 2009, at 6:59 PM, teejk wrote:

    GE...I think more than 50% of their business has come from GE Capital Corp (i.e. bank, probably worse than a bank with "leveraged leases"). What started as a means of financing things they actually made like appliances, jet engines and medical equipment got out of control.

    They do probably have to break-up, send the toxic capital corp assets to TARP and return to their roots. Much smaller business but great brands and businesses.

  • Report this Comment On March 04, 2009, at 1:10 PM, cydcyd wrote:

    Business...Any company that Begins...Will end unless...They had been totally honest.

    It is not Truthfull to pay high bonuses to people who

    did not pay attention to the economy & fair play

    The companies if wanting to pay bonuses should

    have also payed the everday worker...Not just that 100.00 thing...

    Lot of arrogant egos in HIGH Finace.

    Now the everyday tax payer is HELPING

    I guess what goes around...Comes Around & always will.

  • Report this Comment On August 10, 2009, at 4:19 PM, howardkaye61 wrote:

    How disgusting can you get? The government is now the major owner of this insurance company (which is us) and we don't even have our "shares" of ownership or voting rights as stockholders. Isn't that special? We are rapidly becoming a Socialistic economy followed by a controlling government (I think they used to call that a dictatorship). Printing money, regulating health care, owning the major banks and the major insurance companies and the major auto manufacturers and the major deficits adds up to a picture that would NEVER have been painted by our founding fathers.

    God bless our kids, they'll need it.

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