AIG Says "Thanks"

We say "Really?"

Well, it’s nice to be thanked.

AIG, or the American International Group insurance company, has launched a 2013 advertising campaign entitled “Thank You America.” The campaign, which will cover print, broadcast, and Web media, is intended to pass on the company’s appreciation to U.S. taxpayers for the largest financial bailout in American history. It also highlights the company’s return to profitablity, and its contribution to communities coast to coast.

We suppose it’s better to be thanked versus the alternative. We’ll admit, though, that the first thing we did upon hearing this news was to check to see if We The People are paying for the AIG’s expressions of appreciation.

We’re not. As of December, 2012, the Treasury has divested itself of AIG stock and has seen a profit of $22.7 billion on its bailout, dating from September 2008, which totaled $182 billion. All in all, that’s not a bad return from a fiscal episode that was, at the time, absolutely terrifying.

But here’s the thing — our well-thumbed ettiquette handbook tells us that gratitude is typically offered for assistance willingly given. Did any of us actually choose to bail out AIG?

Not by a long shot. AIG got bailed out because their bad decisions and poor investments effectively pointed a loaded gun at our collective heads. The Treasury opted to save AIG because not doing so would have likely sunk the economy.

And there’s something frankly self-congratulatory in this “Thank You” campaign. AIG knows, as do we all, that their corporate image was irreparably tarnished in those dark days of 2008. During the financial industry hearings on Capitol Hill, Senator Chuck Grassley (R-IA), famously suggested on the record that AIG executives should resign — or commit suicide.

We won’t go (quite) that far. But we will suggest that AIG’s appreciation might be better expressed more constructively. Couldn’t they have written a check to the Treasury in the amount they’re spending on this campaign? Or given it to the victims of Hurricane Sandy or Sandy Hook?

Saying thanks is supposed to be an act of selflessness. If AIG is able to learn that lesson, we might be more inclined to say, “You’re welcome.”

The C4:

1. The American International Group, or AIG, was laid low in late 2008 after investing heavily in mortgage-based credit default swaps. When their likely collapse seemed destined to crash our economy, the U.S. Treasury bailed them out to the tune of $182 billion.
    
2. But happy days are here again. AIG has paid back all their direct loans, and the Treasury has sold off all the AIG stock it was holding. We’ve recovered that $182 billion, plus nearly $23 billion in pure profit.
    
3. Which is great. Better than most of us expected, in fact. Why then, does it leave a bad taste in our mouths to learn AIG has launched a massive “Thank You America” advertising campaign?
    
4. Because none of us chose to bail out AIG, and because something about “Thank You America” sounds a lot like “Aren’t We Swell?” For obvious reasons, we’re all in favor of advertising campaigns — the bigger, the better, in fact. But in this case we’d rather have seen AIG spend their advertising dollars on a true act of selflessness. That is, after all, how one truly says “thanks.”

The Glitter That Makes Markets Jitter

Where’s the silver lining?

“Gold is a hedge against inflation.” 

That’s such a long-accepted trope you probably don’t remember where you first heard it. Historically, it’s usually been true. The price of gold rises and falls like anything else, but it normally stays fairly closely pegged to the inflation rate. One way to think of it is this: an ounce of gold has always been enough to buy a decent suit of clothes, whether in 1849 when gold was going for $20, or in 2000 when it was up to $300.

But a not-so-funny thing has happened since the 2007 financial crisis — the price of gold itself has become inflated, maybe even hyper-inflated, shooting up to an all-time high last year of nearly $2,000 an ounce.

That’s a pretty nice suit.

So, what was going on there? Was it a bubble fueled by panicky investors here in the U.S.? Talk radio and investing forums were thick with gold hype during the worst of those years. Gold brokers were springing up everywhere, selling dubious gold certificates and engaging in the even more dubious practice of buying gold by mail. This all doubtlessly played a part.

But what played an even bigger role was the chugging engines of Asian economies. China and India, especially, weathered well that financial storm. They had fresh dollars to invest, but Western markets weren’t exactly attractive opportunities. So they invested in what conventional wisdom said was a dependable hedge against inflation. For almost five years Chinese and Indian purchases accounted for more than half the gold consumption in the world.

In the last 12 months things have begun to change. The Chinese and Indian economies have slowed, and with them their purchases of gold. Since September 2011, the price of gold has fallen more than 17% to a still-inflated but somewhat more sane $1,600 per ounce.

Will the slide continue? Or is this an example of a market correcting itself? Time will tell. If anything it’s an abject lesson — perhaps a painful one — for investors. Beware bubbles. Beware hype. And if you’re hedging against inflation, don’t buy in at inflated prices.

The C4:

1. Since the start of the 2007 financial crisis, we’ve seen some disturbing fluctuations in the price of gold; it shot up to an all-time high last year, reaching about $1,900 per ounce. Now it’s begun one of its steepest ever declines, dropping 17% in 11 months.
2. Looking back, there was clearly some gold fever here at home. Conspiracy theorists advocated hoarding while fast talkers were begging us to sell them grandma’s jewelry. That was the start of the bubble.
3. Asia is where the bubble blew up. India and China were just as hungry for gold, and they could afford much more. They started buying more than half of all gold on the market…until their economies started to slow. Which brings us to today.
4. Is gold still a hedge against inflation? History, as they say, is no guarantee of future performance. The price of gold will probably stabilize and it might even become a decent hedge again. But investors would be wise to remember: gold is a commodity, as susceptible as any to inflation and deflation. Markets have behaved irrationally when it comes to gold, and there’s no reason that won’t happen again.