AIG: Too Big to Fail
If ever there were an institution too big to fail, Cramer said it’s AIG.
In fact, he thinks the Dow could drop another 1,000 points if the government doesn’t help save the company. If that help doesn’t arrive by Wednesday morning, the market could give back any gains made in Tuesday trading – gains had only, Cramer believes, because of reports of a possible Washington intervention – and then drop another 500 points on top of Monday’s loss.
“The sheer number of individuals and businesses that depend on this company is so monumental,” Cramer said, “that I think it's safe to say the whole financial world might seize up if AIG looks likes it’s going to go under.”
Yes, Cramer thinks the situation is that serious. Federal Reserve Chairman Ben Bernanke never mentioned any of this in the central bank’s interest-rate announcement Tuesday afternoon. Instead he towed the usual fear-of-inflation line and kept rates unchanged at 2%. Strange, though, that Alan Greenspan took rates down to 1% five years ago, and the situation wasn’t half as bad then as it is now.
And you better believe AIG needs saving, Cramer said. Unlike deposit-holding institutions such as Wachovia, AIG has no pool of capital with which to maneuver. The private sector has already said it’s not getting involved, so that means Washington has to. Cramer’s solution: The government should loan AIG $50 billion to ensure there are no defaults on the company’s myriad financial policies, take the common stock over and work on an orderly liquidation of its many valuable parts.
And this isn’t just a U.S. problem. Back in 2005, AIG sold billions of dollars in wraparound loans for European securities. Those loans were considered low risk, but have since become a big problem for AIG. So if AIG fails, then all the European banks that issued these securities could get an immediate credit downgrade. That could results in a Lehman Brothers-like run on one of those banks.
China, too, has plenty of AIG exposure. A lot of countries do. So Cramer wants to see President Bush contacting sovereign wealth funds and ministers of finance to get them involved to help solve this crisis. After all, they have plenty to lose themselves.
Of course, Bush probably won’t do this. He’s not sophisticated enough, Cramer said. Neither is the Fed or Hank Paulson’s Treasury Department. But whether these guys realize the potential for what Cramer called an international crisis or not, the bottom line is that the U.S. government has to take action to save AIG. It’s just too big to fail.
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