The American Prospect had an excellent piece yesterday describing how taxpayers could end up being on the hook for bailing out bad loans to the AI industry even with no new actions by Congress or state legislatures. The mechanism is that life insurance companies have issued hundreds of billions of dollars of private loans to AI-related companies. (We can only speculate on the amount since many of the loans are issued by privately held companies, which don’t have to make detailed disclosures of holdings.) If these companies are unable to repay the loans, then one or more insurers could go bankrupt.
States have insurance pools that require all the insurers in the state to cover the liabilities of one that goes bankrupt. They make regular contributions to a fund for this purpose, which is similar to the fee charged by the Federal Deposit Insurance Corporation for covering the cost of insuring deposits in banks that fail.
In the case of insurers, this is handled at the state level with rules that vary by state. However, the failure of a major insurer is likely to require additional funds from other insurers or money from state legislatures. In the former case, it will mean lower returns on insurance policies for people in the state, and quite possibly jeopardize their health as well. In the latter case, it will be a serious burden to already cash-starved state governments.
There is a simple way to reduce the likelihood of this sort of bailout on insurers’ bad AI investments. The bankruptcy laws can be changed to make private equity (PE) companies liable for the debts incurred by the companies they own and control. Senator Elizabeth Warren and Representative Mark Pocan proposed this change as part of their Stop Wall Street Looting Act in the last session of Congress.
This matters in the current context because many insurers have been bought by PE companies in recent years. While the insurers may be unable to repay their debts, the PE companies that own them may still have billions of dollars of assets.
Changing the law in this way not only prevents PE companies from walking away from the wreckage caused by the companies they drive into bankruptcy; it would also force the insurers they own to be more cautious with their lending. If the PE companies were themselves on the hook, they would discourage insurers from making too many high-risk loans.
That is exactly the outcome we should want to see: financial firms making loans based on their perceived risk, not the idea they can dump the losses off on someone else if the loans go bad. This is a great example where the progressive (more egalitarian) policy involves less government, rather than more. We get better outcomes and reduce the likelihood of government bailouts simply by changing bankruptcy laws.
Unfortunately, we are not likely to see this sort of change in bankruptcy law any time soon. Most Republicans and many Democrats count on campaign contributions from PE and will not want to cross the people who pay for their elections. But it is important for people to know that we can reduce the risk of a big AI bailout if there is the political will.
This first appeared on Dean Baker’s Beat the Press blog.
