American International Group, in a gloom and doom discussionpaper, has warned regulators that unless it is kept afloat, therewould be "turmoil in the U.S. economy and global markets."

The "strictly confidential" document--titled "AIG: Is the RiskSystemic?"--has undergone several drafts. The one obtained by NUOnline was dated Friday, March 6, and was prepared with governmentinput, NU learned.

After reporting a $61.7 billion fourth-quarter loss last week,AIG announced that the terms of government support for theconglomerate that operates in 140 countries was eased, withregulators agreeing to provide $30 billion in additionalcapital.

Such extreme measures are necessary, because what happens to AIG"has the potential to trigger a cascading set of further failures,which cannot be stopped except by extraordinary means," the firmargued.

"The failure of AIG would cause turmoil in the U.S. economy andglobal markets, and have multiple and potentially catastrophicunforeseen consequences," the firm added.

"The inability of AIG to immediately secure additionalassistance from the Federal Reserve and the Department of theTreasury threatens not only AIG's sales process, but also consumerand business confidence around the world," the company said.

According to AIG's draft, "systemic risk is principally centeredin the 'life insurance' business because it is this subsector thathas the greatest variety of investments and obligations that aresubject to loss of value of the underlying investments."

The company predicted that if it were to fail, "it is likely tohave a cascading impact on a number of U.S. life insurers alreadyweakened by credit losses. State insurance guarantee funds would bequickly dissipated, leading to even greater runs on the insuranceindustry."

While calling some of the potential consequences it wasoutlining as "inherently judgmental and, to an extent,speculative," AIG said the bankruptcy of financial giant LehmanBrothers Holdings Inc. led to the unquestionable conclusion "thatthe adverse consequences of the failure of a major financialinstitution cannot be foreseen."

AIG argued that "just as the government was unable to predictthat the failure of Lehman would lead to the collapse of theReserve Fund, followed by much of the money market industry, thegovernment would be even less capable of predicting the fallout ofthe collapse of a much larger, more global and moreconsumer-oriented institution such as AIG."

Much of the draft was filled with figures outlining the enormousbreadth of the company's impact.

Among the numbers contained in the draft:

o The company's failure would impact 116,000 AIG employees and74 million customers worldwide--including 30 million in the UnitedStates.

o The company said that nearly one-third of all people in theUnited States are employed by an entity that is protected byinsurance coverage through AIG Commercial Insurance.

o AIG Retirement Services has 6.9 million customers, whileAmerican General Finance is serving more than two million familieswith $24 billion in loans.

According to the draft obtained by NU Online, "AIG does notintend to update this Presentation following its distribution.Although AIG believes the information included in this Presentationis accurate, AIG makes no representation or warranty as to itsaccuracy or completeness."

Despite AIG's pleas and support from regulators, the idea ofmore aid for AIG has received a hostile reaction from federallawmakers.

Sen. Jim Bunning, R-Ky., at a March 5 Senate Banking Committeehearing, told Federal Reserve Vice Chair Donald Kohn: "You will getthe biggest 'no' you ever got. I will hold the bill. I will doanything possible to stop you from wasting the taxpayers' money ona lost cause."

Sen. Robert Menendez, D-N.J., said the Fed was asking for "anopen-ended check" that it would not get.

AIG and New York Insurance Superintendent Eric Dinallo, who hasreceived the draft, said they had no public comment on thereport.