Bailout gives AIG unfair competitive advantage.

[girl gone mad]

Bailout Effect: AIG Underpricing Commercial Coverage
Barry Ritholtz, http://www.ritholtz.com/blog/2009/03/bailout-effect-aig-underpricing-commercial-coverage/">The Big Picture

File this one under what moral hazard and unintended consequences produce: The legitimate, non-structured finance/hedge fund run Life Insurance competitors have a legitimate complaint. Why is AIG underpricing Commercial Coverage? They argue, persuasively, I might add, that its due to the government subsidy AIG has received.

Yet another example of how bailouts cause all manner of consequences in the marketplace. Legitimate and well run companies find themselves at a serious competitive disadvantage when firms like AIG are showered with billions of dollars in reward for their horrii management and bad behavior.

Bloomberg reported that

“American International Group Inc., the insurer that got four bailouts from the federal government, has been the subject of complaints from rivals who say the firm is underpricing commercial coverage, a regulator said. Competitors have said AIG was able to charge lower rates after getting government help, said New York Insurance Superintendent Eric Dinallo in an interview with Bloomberg Television today.

“We worry just as much about low pricing as high pricing,” because the industry needs to have enough capital to pay claims that may emerge years after policies are sold, Dinallo said. AIG, based in New York, sells coverage protecting companies against lawsuits, property damage and worker injuries.

Insurers including Hartford Financial Services Group Inc. have also applied for capital from the federal government, seeking to join more than 500 financial institutions that have received about $300 billion in government funds. Other insurers have complained that government aid gives a competitive advantage to the weakest firms at the expense of those that don’t need extra capital.”

Moral hazard not only encourages more bad behavior from poorly run firms, it punishes the good behavior of well run firms.

[Lasher]

1. Maybe divestiture will rectify this.

If AIG is too big to fail it is too big to continue such an existence. Maybe a breakup will occur when we repair the damage done by The Gramm-Leach-Bliley Act of 1999 and The The Commodity Futures Modernization Act of 2000.