AIG Told U.S. Failure May Cripple Banks, Money Funds
March 9 (Bloomberg) -- American International Group Inc. appealed for its fourth U.S. rescue by telling regulators the company’s collapse could cripple money-market funds, force European banks to raise capital, cause competing life insurers to fail and wipe out the taxpayers’ stake in the firm.
AIG needed immediate help from the Federal Reserve and Treasury to prevent a “catastrophic” collapse that would be worse for markets than the demise last year of Lehman Brothers Holdings Inc., according to a 21-page draft AIG presentation dated Feb. 26, labeled as “strictly confidential” and circulated among federal and state regulators.
“What happens to AIG has the potential to trigger a cascading set of further failures which cannot be stopped except by extraordinary means,” said the presentation by New York- based AIG. “Insurance is the oxygen of the free enterprise system. Without the promise of protection against life’s adversities, the fundamentals of capitalism are undermined.”
Regulators revised AIG’s bailout last week to ease loan terms and extend $30 billion in fresh capital after the firm posted a $61.7 billion fourth-quarter loss, the worst in U.S. corporate history. Lawmakers are reluctant to give more support beyond the package already in place, worth about $160 billion, because they say regulators haven’t given enough detail about how the funds are being used or when the bailouts will end.
The Fed is “asking for an open-ended check” and is “not going to get” it, Senator Robert Menendez, a New Jersey Democrat, said last week in Congressional hearings.
Global Impact
AIG warned of turmoil around the globe if the government allowed the insurer to fail, adding “it is questionable whether the economy could tolerate another shock to the system that a failure of AIG would produce.” The value of the U.S. dollar might fall, Treasury borrowing costs could rise and the agency would face “doubts about the ability of the U.S. to support its banking system,” according to the presentation, parts of which were reported earlier by the New York Times. The municipal bond market would be stressed and Boeing Co. could lay off workers if AIG’s plane-leasing unit folded, the company said.
“It seems like they’re reaching on this litany of claims they’re making, some of which aren’t supported” by facts, said Haag Sherman, who helps oversee $8 billion as chief investment officer of Houston-based Salient Partners. “They are correct that without the government stepping in, you’d see big holes blown in the equity of American and European banks.”
Overseas Seizures
Under the scenarios sketched by AIG, European banks that bought credit-default swaps might need to raise $10 billion in capital and could face rating downgrades. Life insurance customers, their faith shaken in the industry, would redeem some of their $19 trillion in U.S. policies, overwhelming firms already weakened by the credit crisis, AIG said.
The $38 billion in support provided by the firm to money- market funds would be in jeopardy, AIG said, possibly forcing some to “break the buck.” The term refers to a money fund that suffers losses so large that it must pay investors less than the traditional $1-a-share value that gives the short-term funds their reputation for safety.
Outside the U.S., where AIG operates in more than 140 countries, a collapse could lead to the “immediate seizure” of its businesses by regulators and could impair “the entire insurance industry within certain regions,” the presentation said, which added that its conclusions were “speculative” and a matter of judgment.
Creating ‘Crisis’ Atmosphere?
“Who knows if what they’re saying is true?” said Phillip Phan, professor of management at the Johns Hopkins Carey Business School in Baltimore. “A lot of it sounds like conjecture, that if AIG collapses the rest of the industry will, too. It’s a way of creating a crisis atmosphere and the sense you have to respond quickly.”
Fed spokeswoman Michelle Smith said the central bank “came to its conclusions based on our own analysis.” The risks associated with an AIG failure were “unacceptably large” and could “deepen the current economic recession,” the Fed said today in a report posted on the Senate Banking Committee Web site. Christina Pretto, an AIG spokeswoman and Isaac Baker of the Treasury declined to comment.
If AIG were forced to liquidate its investments, it would have “enormous downward pressure” on asset classes including municipal bonds, the firm said. The company’s commercial insurance division owns more than $50 billion in muni bonds.
ILFC
AIG’s International Lease Finance Corp. is the world’s biggest aircraft lessor by plane value, and its failure would jeopardize $12.5 billion in orders, causing job losses at Chicago-based Boeing. ILFC would have to sell its 1,000 planes at distressed prices, “severely impacting” the aircraft industry. Banks and pension funds holding about $30 billion in ILFC debt would take losses, the company said.
European banks named by AIG as potentially needing capital if the insurer fails include the Royal Bank of Scotland Group Plc, Societe Generale SA, BNP Paribas SA, Banco Santender SA, Danske Bank A/S, Rabobank Group NV, Credit Logement SA and Credit Agricole SA’s Calyon.
Danske Bank has insured a third of its mortgage bonds through AIG, which promises a payout of $200 million in case of “extreme high losses,” the Danish lender said in a statement. The agreement can be annulled in 2010 and AIG has not yet paid out any money, Danske bank said.
Credit Logement Chief Financial Officer Eric Veyront said in a telephone interview that the firm “wouldn’t be directly touched by an AIG failure.” The company estimates it has about 10 million euros at risk “at a maximum” on credit-default swaps where AIG is counterparty, he said.
Buffett Supports Aid
Rabobank sold assets insured by AIG at yearend, effectively ending the contracts, said Raymond Salet, a spokesman for the Utrecht, Netherlands-based bank. The transaction didn’t impact Rabobank’s annual results, he said. Representatives from RBS, Societe Generale, BNP, Santander and Calyon didn’t immediately have comment.
AIG’s latest rescue package includes equity, new credit and lower interest rates on existing loans designed to keep it in business. Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Timothy Geithner have said the government must prop up AIG to avoid damaging the financial system.
Billionaire Warren Buffett, appearing on CNBC today, said the bailout of “quasi-financial” firms like AIG was necessary, even if everyone dislikes what had to be done to salvage it.
New York Insurance Superintendent Eric Dinallo said at a March 5 hearing he had received the presentation.
Bailout Beneficiaries
The document doesn’t say which other companies have benefited from AIG’s repeated rescues. Goldman Sachs Group Inc. and Deutsche Bank AG were among at least two dozen financial institutions that were paid $50 billion from the bailout funds received by AIG, the Wall Street Journal reported, citing a confidential document and people familiar with the matter whom it didn’t identify.
Goldman and Deutsche got about $6 billion each between September and December, the Journal said. Merrill Lynch & Co., Societe Generale, Morgan Stanley, Royal Bank of Scotland and HSBC Holdings Plc were other counterparties that also received payments, the newspaper said, citing the document.
AIG’s presentation said that without more U.S. help, investment losses would mean “AIG will not be able to repay its obligations” and that cash previously provided by the U.S., which controls a 79.9 percent stake in the insurer, could be lost. Chief Executive Officer Edward Liddy, who took over the top job in September, has vowed that AIG will repay all of its debts to taxpayers.
Potential Job Losses
At AIG itself, failure could have led to dismissals from its workforce of 116,000, the document said. At that level, the staff is unchanged from the end of 2007 before AIG’s bailout. The global credit crunch has led to at least 284,000 job cuts at the rest of the world’s financial companies, according to Bloomberg data.
The insurer’s first bailout package, crafted last September, later grew to $150 billion. After failing to sell enough subsidiaries to repay the government, AIG had to turn to U.S. taxpayers again. The company may need more support if financial markets don’t improve, the Treasury and Federal Reserve said last week in a joint statement.
-- With reporting by Fabio Benedetti-Valentini in Paris, Charles Penty in Madrid, Niklas Magnusson in Stockholm, Martijn van der Starre in Amsterdam and Andrew Macaskill in London. Editors: Rick Green, Sharon L. Lynch
To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net.
Last Updated: March 9, 2009 19:18 EDT
Mr. Wildman says Do your own DD 
