Why AIG's Bailout Is Good For India

For a country which doesn’t like to hear the term ‘Socialism’, the US government backed bailout of insurance company AIG is exactly that: pure unbranded socialism. Politically the government might have given it a spin saying that this was a bailout of AIG’s consumers and insurance policy holders and not the shareholders. The fact however remains that this bailout was necessary to prevent a bigger stock market crash across the world. Had AIG not been saved by the US Federal Reserve, the ripples would have been massive for the Indian markets because apart from the obvious global impact, AIG is also an important stock holder in many Indian equities.

AIG has had an Indian presence for quite a while. They partnered with the Tata group and formed a joint venture to provide insurance services in India under the ‘Tata AIG’ brand. They are among the top 10 providers of insurance services across both the General and Life sectors.

Knowing this situation and the news that AIG could also go bust the Indian insurance regulatory body IRDA sought an explanation from the company regarding its future. The company is not in danger and would not have been for long if AIG had shut shop. This is because Tata AIG is a company with the Tata group holding 74% of the company as compared to AIG which only holds 26%.The Tata group would have bought out AIG’s stake if they were in trouble.

The important matter for the Indian market is the fact that the same insurance company holds significant positions in many Indian companies. AIG’s assets under the Tata AIG group include shares in Zee News, Voltas, EMCO and McNally Bharat among others. It doesn’t stop there. There are many Indian independent subsidiaries of AIG which hold shares in companies like Federal Bank, Gayatri Projects, Bharati Shipyard, Ipca labs and IT company Mindtree among others.

A systematic liquidation in these stocks might have very well spawned a new wave of panic selling on the Indian markets. A second wave of panic selling right on the back of the Lehman Brothers crash would have led to another drubbing of the Sensex. The market is still recovering and does not want to attract any more disaster.

It is therefore good for Indian stocks that AIG is currently still in existence. The equity markets have survived the fall of Lehman Brothers and didn’t protest too much on hearing that the US Federal Reserve would not bail them out because their operations in India are very limited.AIG’s on the other hand are not. They run into millions of dollars.

The US Fed has taken over the company with a formula that allows them to own almost 80% of the company and an investment of a massive 85 Billion Dollars. After having already taken over the housing firms Fannie Mae and Freddie Mac, anchoring a number of mergers in the banking sector, the US Federal Reserve has now moved into saving the insurance sector.

Not every bank can and will be bailed out as we saw in the case of Lehman Brothers.However, AIG should consider itself lucky. Its fall would have been disastrous for every market across the world including our own Sensex.