The board of directors of American International Group decided today that AIG would not take part in ongoing shareholder lawsuits against the government for its September 2008 bailout of the company. AIG explained that the board was legally obligated to consider whether to participate in the legal actions. The company was correct about this point; the board has a fiduciary obligation to look out for the best interests of the company, even if doing so means looking ungrateful for its taxpayer bailout. The second point AIG made in its statement, however, is not correct when viewed in proper context.
The AIG loan was not, as AIG claims, a profitable venture for the taxpayer. By lending money to AIG at a time when nobody else wanted to, the American people took a tremendous risk. Other potential lenders looked at AIG and concluded that it was insolvent; its assets were worth less than the amount of money needed to save the company. They were not willing to lend at any price. The fact that taxpayers have gotten back a bit more than we put in does not compensate us for having invested in a severely troubled company. Setting aside the impropriety of government investments in private companies, we could have earned more and slept better at night if we had invested the money in a healthier company or portfolio of companies. AIG ended up surviving, in large part because the government's loan sent a signal that AIG would never be allowed to fail and that its creditors would get paid in full.
AIG is running ads this week to thank the American people for bailing it out. As heartwarming as these ads are, putting government money into AIG was a mistake. The company should have been permitted to stand or fall on its own. Then it would not have had to thank American taxpayers--or consider suing them--for bailing it out.