Monday 11 December 2017

Max Doyle Short View

THE ongoing cost of the US government bailout of insurance giant AIG in September 2008 is running at about $110bn. The rescue was designed to avoid system meltdown/systemic risk -- a nemesis for all regulators.

If AIG had collapsed it would have led to a catastrophic domino effect throughout the capital markets such was the girth of its activities. While this scenario was avoided, the reluctance of the Federal Reserve to reign in AIG prior to September 2008 probably cost US taxpayers additional billions.

The prospect of a failure of Quinn Insurance would also lead to a severe system failure among thousands of Irish businesses and individuals relying on the insurer to pay claims and maintain essential cover.

The speed with which regulator Matthew Elderfield acted has to be applauded.

Elderfield's early actions may end up reducing the restructuring costs of Quinn Insurance because it continues to trade successfully throughout administration.

Given Anglo Irish Bank's dependence on the survival of the Quinn group, any action the bank takes to fortify its position will be closely watched. Many market theorists have asserted that Goldman Sachs' demands for cash precipitated AIG's collapse -- the subject even occupies a full page of the chairman's report in Goldman's 2009 report.

Goldman Sachs itself received $10bn in direct support from the US Treasury but this money was repaid in full with a 23 per cent return last summer.

Ireland does not have exclusivity when it comes to state-supported banks being embroiled with struggling insurance companies. However, the news delivered by Lloyd Blankfein, Goldman's chairman, is set against the backdrop of net earnings of $13bn, a staunch defence of executive compensation.

Max Doyle is a principal of Prime Focus Management Ltd, an Irish firm specialising in investment and turnaround of SMEs

Sunday Independent

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