Counterpunch, September 17, 2008
Wall Street Panic Blues
The End of the Blue Chip Economy
By DAVE LINDORFF
AIG, the quintessential blue-chip, one of the 30 companies that compose
the Dow Jones Industrial Average, a company that in 2000 boasted a
market capitalization of $217 billion, making it the largest financial
institution in the world, is teetering on the brink of collapse. Worth
just $7 billion today, the future of what was until recently the world’s
largest insurance company is hanging by a thread—that thread being the
willingness of Wall Street institutions like Goldman Sachs and Morgan
Stanley, themselves facing credit issues, to come up with $75 billion in
rescue loans.
It used to be that investors who were worried about financial markets,
or who didn’t like to take big risks, would put their money in what were
called “blue chips”—companies that were deemed conservative, safe
investments that could weather any storm. They had names like AT&T,
General Motors, Ford, Boeing…and AIG.
Well, AT&T is a shadow of its former self, GM and Ford are both being
talked of as dead men walking by analysts, Boeing is on life-support,
or, since it is being propped up by its military contracts, more
appropriately death support, and AIG, well, it’s already got one foot in
the grave.
There really are no blue chips any more. The largest companies in the
world, as Enron showed, can vanish overnight in a puff of smoke. Look at
Lehman Brothers. Here today, then, poof, gone tomorrow.
In AIG’s case, if the insurance giant goes under, it may take a lot with
it.
An article today in the Australian daily The Australian (Rupert
Murdoch’s NewsCorp flagship and hardly a Marxian rag) put it this way:
Should the US Federal Reserve fail in last-ditch efforts to secure
breathing space for AIG, then sub-prime's cascading woes will have
slowly smashed financial markets into worse shape than the legendary
market meltdown of 1987.
And, from there, governments and banking regulators alike will have to
ponder the previously unthinkable: are we on the way to a place
comparable with 1929?
So what are anxious investors to do? Clearly there are no safe harbors
in the stock market, which could as easily drop 40 percent or 70 percent
tomorrow as rise 3 percent. Bonds don’t look much better. They may be
more stable than equities, but not if the company that issues them goes
bust. Then they are worthless scraps of paper, no better than the share
certificates for Fannie Mae that are now being used to line cat litter
boxes. The ratings agencies, like Standard&Poors and Moody’s, while
exercising their usual timidity about downgrading a major corporate
entity, have belatedly knocked AIG’s credit rating down two notches
today, which is their way of hinting that if you are an AIG bondholder,
you have a significantly greater chance of losing your shirt.
Nor is it just investors who have to fear. Individuals who have tried to
protect their families by purchasing life insurance policies, or who
have sought to establish a secure retirement income by buying annuities
from AIG, need to worry about whether the company will be around to make
the payments when they or their beneficiaries need them. Sure, the
states, which are responsible in the US for regulating the insurance
industries, for the most part have established reserve funds to backstop
insurance carriers, but like the FDIC which insures bank deposits up to
only $100,000, these funds generally only back the first $100,000 of
insurance or annuity coverage as a “cash surrender” value, or $300,000
as a benefit payout. But those state guaranty funds were designed to
protect people from failures of fly-by-night insurance operations. They
are woefully underfunded for companies on the scale of AIG.
AIG is such a giant in the insurance business that as one corporate
treasurer told The Australian:
“If AIG collapses, then the world doesn’t have insurance.”
The New York Times, commenting on fears among ordinary people that their
insurance or their annuities may not be there when needed, quoted one
insurance adviser, Glenn Daily, who said a client who was an AIG policy
holder was borrowing the maximum against his life policy, planning to
park that money somewhere to see if the AIG crisis blows over. But he
added darkly, “If everyone does this, the company could be driven out
of business.”
Actually, it’s worse than that. As Michael Lewitt, a Florida-based money
manager, wrote today in an opinionarticle in today’s New York Times, AIG
is a key player in the $60 trillion (yes that’s trillion with a “T”!)
credit swap default market, a huge, international and wholly unregulated
field in which hedge funds play, and whose collapse would make the 1929
Great Crash look like a minor fender-bender.
So that’s what it’s coming down to. There are no Blue Chip refuges from
the rolling disaster that is the US economy today. And there are no easy
rescues—indeed according to one theory Treasury Secretary Henry Paulson
let Lehman Brothers go bust because he knew he needed what funds the
Treasury has left to try to keep AIG alive. It’s all a fragile,
interconnected house of cards, propped up by a residual faith among
ordinary investors who, at least so far, still think it has some kind of
inherent structure to it. As card after card gets pulled out of that
rickety stack—first Bear Stearns, then IndyMac Bank, then Fanny Mae and
Freddie Mac, then Lehman Brothers, now perhaps AIG and Washington
Mutual, a large savings institution that is on a death watch—at some
point those investors and now insurance clients, too, may all decide to
take their money and go home, and the whole thing will come crashing down.
The good news is that, if the US economy collapses, the Pashtun farmer
in northeastern Pakistan, the Iraqi shopkeeper in Fallujah, the Iranian
worker in Tehran, and the peasant in Venezuela, will no longer have to
worry about being bombed or having their children mowed down by a US
helicopter gunship. The US would no longer have the funds to pay for
such foreign wars. And because a collapse of the US consumer economy
would also drag the rest of the world into a prolonged global slump,
perhaps reminiscent of the 1930s, we might actually see a significant
enough drop in carbon emissions from idled cars, factories and power
plants that the global warming catastrophe that is threatening us all
will be significantly delayed, giving humanity time to come up with a
serious long-term response.
DAVE LINDORFF is a Philadelphia-based journalist and columnist. His
latest book is “The Case for Impeachment” (St. Martin’s Press, 2006 and
now available in paperback edition). His work is available at
www.thiscantbehappening.net
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