The Problem With AIG

If you insure something, it had better be quantifiable. If you insure property, you'd better know how much the property is worth. If you insure lives, you'd better know how much exposure you have. If you insure autos, you'd better know the accident rate. That's why you might want to own Chubb (CB - commentary - Cramer's Take), MetLife (MET - commentary - Cramer's Take) and Allstate (ALL - commentary - Cramer's Take), respectively.

But if you insure the unquantifiable, you are in a different position. If you insure financial instruments and you can't assess how much you are insuring, then you are taking on a level of risk that is too difficult to handle.

That's what AIG (AIG - commentary - Cramer's Take) did. It wrote policy after policy insuring mortgages and mortgage portfolios of all shapes and sizes, not just in the United States but in Europe. Especially in Europe.

That's why AIG is so difficult. We don't have federal regulation of insurance and we don't have cross-border regulation of insurance. So we don't know who has the responsibility of regulating or even helping AIG.

And that's why we need some sort of backstop to this one. Any backstop, because AIG has assets it can sell to meet some of its obligations, like its life insurance obligations. But it doesn't have enough assets, I believe, to meet its financial obligations. We need to have parties who took that insurance take their lumps, and we don't know how big the lumps are and how much AIG can make good. AIG is a gigantic MBIA (MBI - commentary - Cramer's Take), and you know how hard that was to unravel.

I don't care about Lehman (LEH - commentary - Cramer's Take). It owned mortgages and it is being repossessed.

I do care about AIG, because it's not that we don't know what it owns, we have that. But what it owes? That can't be understood and hasn't been understood by this management team or the previous one.

Big difference.

At the time of publication, Cramer had no positions in the stocks mentioned.

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