Wednesday, 15 April 2009

A sleeping giant awakens

IN the era of the truly global economy, few players stand out from the rest. These are the giant multinational corporations, whose reach transcends borders, and whose activities dwarf many of even the world’s biggest economies.

And among those business organizations that can be considered truly global in scope and reach, perhaps none could claim to have such a profound influence on the world’s economy than the American International Group (AIG).

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Prior to the meltdown of the world’s financial markets last year, AIG was a behemoth among giants, casting its influence in all corners of the world, and having a stake in all sectors of the financial services industry, from retail to corporate banking, to corporate finance and investment banking, and to securities underwriting and insurance.

So huge was its business expanse that if we were to borrow an old phrase from the English colonialists, we could say that “the sun never sets on AIG’s business.”

Of course, fate has a way of dealing with even the most mighty, and it did deal AIG an almost fatal blow on the occasion of the global financial meltdown.

As it turns out, one of the reasons for the organization’s dominance in the international scene was its large-scale participation in the burgeoning business of assetsecuritization—the now infamous sub-prime mortgage saga, which brought down in its wake a number of well-respected financial institutions, including Lehman Brothers, Merrill Lynch and many others.

When the American housing market started to turn sour, the assets underlying the securities that AIG and the other market makers were issuing shrunk in value, forcing the issuers to ante up collateral to guarantee them with the subsequent buyers. The resulting need for huge amounts of cash collateral forced many into bankruptcy, consolidation and even liquidation.

As the old adage goes, “owe the bank a few thousand dollars, and the bank owns you; owe the bank a few million dollars, and you own the bank.” Fortunately for AIG, the sheer size of its exposure into the global debt markets made it impossible to allow its collapse. If it were to happen, the knock-on impact would be unimaginable. So to stave off a complete financial Armageddon, the Federal government stepped in and rescued the financial giant, propping it up with billions of dollars in federallyguaranteed loans.

While many had written off the financial giant to eventual collapse, slowly but surely AIG rebuilt itself from the ashes of its former self. Many of AIG’s core businesses remained strong, with dominant positions in the major global markets.

For example, Philamlife remains the Philippines’ largest insurer, with a franchise envied by all of its competitors.

A significant part of AIG’s resurgence is the contribution of its current chief executive, Edward Liddy.
A respected investment banker and insurance executive, Liddy brought with him to AIG a credible reputation, which allowed AIG to have an effective dialogue with the Federal government, its current backer and guarantor. It also gave the insurance company a better image in the financial markets.
Today, after a successful stint at stabilizing the wounded giant, Liddy steps down and gives way to an equally respected executive in Robert Benmosche, former MetLife CEO.

Where AIG will go from here on is still a big question mark.

But as Admiral Yamamoto once said after bombing Pearl Harbor, the sleeping giant might just be reawakening.

Published in the Sun.Star Cebu newspaper on August 15, 2009.

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