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February 20, 2009 Friday 03:39 PM EST

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N.Y.'s Dinallo: AIG Shouldn't Be Nationalized 'Yet'

Raymond J Lehmann

NEW YORK

New York Insurance Superintendent Eric Dinallo says American International Group Inc. should not be fully nationalized, though he concedes a fire sale of all of the company's current assets likely wouldn't yield enough to pay off its more than $150 billion in federal loans and guaranties.

"I don't think AIG should be fully nationalized yet; we need to see how this larger transaction plays out," Dinallo said in an exclusive interview with BestWire. "As to whether the loans are going to be paid off, I think it's a question that really is related to the markets. If the markets pick up, (Chairman) Ed Liddy has the time to wait a bit and wait for better market conditions.

"Of course, if you had to do all the sales right now, there would probably not be enough (to pay off the loans), but that's not what the plan is. The plan, I hope, is to wait for the markets to pick up significantly," said Dinallo, AIG's primary domestic regulator.

According to a Feb. 19 filing by the Federal Reserve Bank of New York, interest on two Fed facilities established to unwind the company's credit default swaps and securities lending positions has grown to $158 million, up from $146 million a week earlier.

The $27.7 billion Maiden Lane III facility, established in November, was set up to purchase multisector collateralized debt obligations on which AIG wrote credit default swaps. The facility has thus accrued $5.05 billion in outstanding principal and interest that will be payable to AIG once its senior federal loans are paid off. The $18.6 billion Maiden Lane II facility, established in December, purchases residential mortgage-backed securities from AIG's U.S. securities lending reinvestment portfolio. It has accrued $1.01 billion in deferred payments and accrued interest eventually payable to AIG.

AIG has been looking to pay off its loans, which also include a $60 billion five-year credit facility from the Federal Reserve Bank of New York and $40 billion in preferred stock held by the U.S. Treasury through the Troubled Asset Relief Program, through the sale of assets. Those completed so far include its commodity index business, its Canadian life insurer, property/casualty insurer Hartford Steam Boiler Group, banking and credit card assets in Thailand, and its consumer operations in the Philippines.

"I think he's done a couple of transactions to prove that they can be done, that there's no lurking toxins in the AIG books, but I think that he should not rush into these fire sales across the whole board. I think a couple at lower pricing -- which is the best price he can get right now -- are appropriate," Dinallo said.

He added that his office's primary concern remains protection of AIG's policyholders, and from that perspective, "that feels like a pretty secure position with AIG."

Most AIG insurance companies currently have a Best's Financial Strength Rating of A (Excellent) with a negative outlook.

Shares of AIG were $0.50 in midday trading on Feb. 20, down 14.9% from the previous close.

(By R.J. Lehmann, Washington bureau manager: raymond.lehmann@ambest.com)

February 21, 2009

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