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March 5, 2009 Thursday 04:32 PM EST

933 words


Regulators Unsure of AIG's Ultimate Price Tag to Taxpayers

Raymond J Lehmann

WASHINGTON



Despite more than $170 billion in federal assistance granted the company, the Federal Reserve Board still does not have a firm grasp on what American International Group Inc.'s total potential liabilities to the taxpayers might be, Fed Vice Chairman Donald Kohn said under questioning by members of the Senate Banking Committee.

While predicting that asset sales by AIG would likely be sufficient to pay down its senior loan from the Federal Reserve Bank of New York, Kohn told committee members the outlook for the U.S. Treasury's $70 billion equity stake in the company was not necessarily as secure, and the ultimate value securities held by the Fed's Maiden Lane II and Maiden Lane III facility -- established to buy back mortgage-backed securities from AIG's securities lending program and collateralized debt obligations on which it wrote credit default swap guaranties -- would depend on market conditions.

The Treasury, which already held $40 billion in preferred AIG shares acquired through the Troubled Asset Relief Program, upped its commitment earlier this week under a restructured bailout that includes new $30 billion standby equity capital facility. That new deal, the fourth iteration of government assistance extended to AIG since September, had members from both sides of the political aisle furious with the company's regulators, with several taking shots at the Fed, Treasury, Office of Thrift Supervision and the New York state Insurance Department.

Kohn in particular came under fire for failing to disclose more information about the transactions completed under Maiden Lane II and III, including the identities of counterparties who have sold securities to the two facilities. He said the Fed believes if they were to reveal the identities of companies "who do transactions with entities who later came in under government protection, that people just wouldn't want to do transactions. We need AIG to be a vital part of our credit markets."

"My judgment would be that giving the names could undermine the stability of the company and could have serious knock-on effects to the rest of the financial markets and the government's efforts to stabilize them," Kohn said.

That stance drew harsh rebukes from several members of the panel, with Chairman Chris Dodd, D-Conn., saying he was "deeply troubled" by the Fed's position, and that, without greater transparency, it would be virtually impossible to convince members of Congress to support further aid to financial institutions that could be needed down the road.

"We have invested $170 to $180 billion in one corporation, and you are telling us that the counterparties that got par for their bonds or for whatever, that the American taxpayers shouldn't know who they are?" said Sen. Jim Bunning, R-Ky. "I will do anything possible to stop you from wasting the taxpayer's money on a lost cause. And that's what AIG is. It's a lost cause."

New York Insurance Superintendent Eric Dinallo also faced tough questions from Ranking Member Richard Shelby, R-Ala., regarding the oversight given to AIG's insurance units by the state regulatory system.

"Approximately a dozen of AIG's life insurance subsidiaries operated a securities-lending program, whereby they loaned out securities for short periods in exchange for cash collateral," Shelby said. "Typically, an insurance company or bank will lend securities and then reinvest the cash collateral in very safe short-term instruments. AIG's insurance companies, however, invested their collateral in riskier mortgage-backed securities."

Dinallo said while AIG's life units are "experiencing a lot of the same stresses that other life insurance companies are experiencing across the country," that they remained solvent as operating entities and that the losses suffered by the securities-lending program would be capped at $17 billion.

"I disagree with the concept that the securities-lending program had much of anything to do with the problems at AIG. We calculate that without the federal intervention, the life insurance companies are approximately $10 billion solvent," Dinallo said. "About $40 billion was invested in RMBS. That would be against $400 billion of assets in the life insurance companies."

On the other hand, Scott M. Polakoff, acting director of the U.S. Office of Thrift Supervision, offered something of a mea culpa, suggesting that as regulator of AIG's holding company, his office should have exercised its authority in 2004 to stop AIG's Financial Products division from writing $80 billion of credit derivatives guarantying multisector collateralized debt obligations that were exposed to the subprime mortgage market.

"We should have taken an entirely different approach with the credit default swaps than what we took," Polakoff said, adding that the OTS had regular conferences with the U.K.'s Financial Services Authority to discuss the Financial Products unit. Asked to comment on frequent reports identifying the unit as "unregulated," Polakoff said "That would be a false statement."

Sen. Bob Menendez, D-N.J., also reiterated concerns raised by a number of competitors and trade groups about the impact the AIG bailout is having on the property/casualty market, arguing that the company's units have been lowering rates below acceptable levels to retain market share. Dinallo said his office already was investigating such allegations, but that they had not yet come to a conclusion on whether there was sufficient evidence of inappropriate pricing by AIG's property/casualty entities.
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(By R.J. Lehmann, Washington bureau manager: raymond.lehmann@ambest.com)

March 6, 2009

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