Selling lemon to the people
15 Oct 2012 9:51 PM GMT
This is the story of an American giant corporate that is in the insurance business. In 2008, one day in September, the bond s and other credit instruments it had created as derivatives of the huge level of investible finances held in its insurance, collapsed.
This was not an atypical case, for all around the insurance behemoth, wreckage of banks, financial institutions and other investment management institutions were piling up. But who could tell it could even happen to this insurer with billions of dollars of public money held in trust. When the news that its bonds had become junk hit the streets, there was panic in New York and Washington. Many shook their head with ‘I told you so,’ writ large.
The company had been warned that its foray into the credit-derivatives market was fraught with danger. But its board of management took these warnings with an all encompassing insouciance – for they knew best.
The US Federal Reserve was the first to blink, as the US department of treasury were banging on the panic button. It created a bailout package of $ 153 billion that was considered the largest ever, in the annals of private sector capitalism.
The inter-linkages of these ‘now’ junk AIG bonds with the other financial institutions was so intricately woven, that even the neo-liberal US government had to think of propping the company with capital infusion by the government to the extent, which at one point of time gave Washington 83 per cent ownership of the company. For, the company’s public holdings and its interrelationship on the Wall Street and beyond made it ‘too large to lose the survival battle.’
This, in other words, was a mammoth bailout of the past giant of American, indeed global, capital held privately. Now, with the government owning 83 per cent of the company, it had been like an alley rat scurrying for cover. So, this temple of mammon – a symbol of neo-liberal capitalism – has suddenly over-night become a public sector company.
This is the time when the reader either would have guessed the name of the company, or is desperate to know it. The company’s name is American Intrernational Group [AIG]. In India, after the insurance sector was opened up to the domestic private players in the 1990s, the company got into a joint venture with the Tata group – thus forming the Tata-AIG Insurance – a big player in the country’s general insurance market.
Now that the Manmohan Singh-led United Porgressive Alliance government has allowed foreign direct investment limit, this company, AIG, could raise its stake in the Indian joint venture to 49 per cent. And, of course, it also poses a greater risk to the Indian investing public; almost the same it posed to the investors in the USA and UK, besides in other countries.
Of course the government has played a trick. It knows that this change can only come about after Parliament accepts the rise of the capital limit and makes the change in the insurance laws. So in the process, it wants to test the health of the so called ‘political consensus’ on neo-liberal policies. It wants to begin the process of political consolidation around its policies that could lay the ground rules of a new electoral equation for 2014.
It knows that Mulayam Singh Yadav especially, and Mayawati, to an extent will be chary in just signing up. But the raging uncertainty in the political environment will also stop them from pushing the country into an electoral chaos. So what would they do?
Billions of rupees are riding on this question, with the political punters gaming scenarios. Meanwhile, the foreign sponsors of the cast of characters at play can remain happy for the time being. And Manmohan Singh can no longer be called an ‘underachiever’ any more.
The AIG and other foreign insurance companies, in a joint venture with an Indian company, will be guided by the Insurance Act of 1938, which has detailed rules about how the investible funds are to be channelised into money market.
So the question to be also raised was who will enjoy oversight rights on these companies and whether that oversight is sufficient as a regulatory mechanism. These are not just questions about the fitness of the government’s proposal to raise the foreign stake; not even about the health of foreign entities; but are questions about the Indian political economy.
Considering the weaknesses of the regulatory legislation, not just at the implementation level, but at the level where they are legislated, casts a dark shadow on the whole process. Already, the equity or debt-linked insurance policies of the some of the leading organisations are being questioned in terms of their efficacy, as most of them do not discount the factors that lead them to the vagaries of money market fluctuations. The people who think that FDI is a panacea to all ills that the Indian economy suffers, should not take the attitude of ‘selling a lemon’ to the country’s people.
Pinaki Bhattacharya is a senior journalist.
This was not an atypical case, for all around the insurance behemoth, wreckage of banks, financial institutions and other investment management institutions were piling up. But who could tell it could even happen to this insurer with billions of dollars of public money held in trust. When the news that its bonds had become junk hit the streets, there was panic in New York and Washington. Many shook their head with ‘I told you so,’ writ large.
The company had been warned that its foray into the credit-derivatives market was fraught with danger. But its board of management took these warnings with an all encompassing insouciance – for they knew best.
The US Federal Reserve was the first to blink, as the US department of treasury were banging on the panic button. It created a bailout package of $ 153 billion that was considered the largest ever, in the annals of private sector capitalism.
The inter-linkages of these ‘now’ junk AIG bonds with the other financial institutions was so intricately woven, that even the neo-liberal US government had to think of propping the company with capital infusion by the government to the extent, which at one point of time gave Washington 83 per cent ownership of the company. For, the company’s public holdings and its interrelationship on the Wall Street and beyond made it ‘too large to lose the survival battle.’
This, in other words, was a mammoth bailout of the past giant of American, indeed global, capital held privately. Now, with the government owning 83 per cent of the company, it had been like an alley rat scurrying for cover. So, this temple of mammon – a symbol of neo-liberal capitalism – has suddenly over-night become a public sector company.
This is the time when the reader either would have guessed the name of the company, or is desperate to know it. The company’s name is American Intrernational Group [AIG]. In India, after the insurance sector was opened up to the domestic private players in the 1990s, the company got into a joint venture with the Tata group – thus forming the Tata-AIG Insurance – a big player in the country’s general insurance market.
Now that the Manmohan Singh-led United Porgressive Alliance government has allowed foreign direct investment limit, this company, AIG, could raise its stake in the Indian joint venture to 49 per cent. And, of course, it also poses a greater risk to the Indian investing public; almost the same it posed to the investors in the USA and UK, besides in other countries.
Of course the government has played a trick. It knows that this change can only come about after Parliament accepts the rise of the capital limit and makes the change in the insurance laws. So in the process, it wants to test the health of the so called ‘political consensus’ on neo-liberal policies. It wants to begin the process of political consolidation around its policies that could lay the ground rules of a new electoral equation for 2014.
It knows that Mulayam Singh Yadav especially, and Mayawati, to an extent will be chary in just signing up. But the raging uncertainty in the political environment will also stop them from pushing the country into an electoral chaos. So what would they do?
Billions of rupees are riding on this question, with the political punters gaming scenarios. Meanwhile, the foreign sponsors of the cast of characters at play can remain happy for the time being. And Manmohan Singh can no longer be called an ‘underachiever’ any more.
The AIG and other foreign insurance companies, in a joint venture with an Indian company, will be guided by the Insurance Act of 1938, which has detailed rules about how the investible funds are to be channelised into money market.
So the question to be also raised was who will enjoy oversight rights on these companies and whether that oversight is sufficient as a regulatory mechanism. These are not just questions about the fitness of the government’s proposal to raise the foreign stake; not even about the health of foreign entities; but are questions about the Indian political economy.
Considering the weaknesses of the regulatory legislation, not just at the implementation level, but at the level where they are legislated, casts a dark shadow on the whole process. Already, the equity or debt-linked insurance policies of the some of the leading organisations are being questioned in terms of their efficacy, as most of them do not discount the factors that lead them to the vagaries of money market fluctuations. The people who think that FDI is a panacea to all ills that the Indian economy suffers, should not take the attitude of ‘selling a lemon’ to the country’s people.
Pinaki Bhattacharya is a senior journalist.
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