New York Insurance Superintendent Eric Dinallo--who played a critical role in negotiations to salvage American International Group last week--will oversee a National Association of Insurance Commissioners task force created to expedite the approval of sales of AIG assets to repay its Federal Reserve loan.

Creation of the task force was approved by commissioners in a late afternoon conference call on Sept. 16, as federal and state regulators worked with the Treasury Department to finalize a solution to AIG's liquidity crisis, according to David Neustadt, an insurance department representative.

The move implied that prompt action to sell AIG assets and pay off the 24-month government bridge loan secured last week is necessary to get the best value for the government and shareholders.

In an appearance the morning of Sept. 16 on CNBC's "Squawk Box," Mr. Dinallo lauded state regulators for the way they dealt with AIG's problems, as the company became engulfed in a financial tsunami linked to the plunging value of housing assets.

He also voiced confidence in his decision to approve the appointment of Edward Liddy, former CEO of Allstate, as the new CEO of AIG. Mr. Dinallo characterized Mr. Liddy as a "sterling insurance executive with great competency" to oversee AIG and the sale of the assets needed to pay off the government loan.

Mr. Dinallo spoke as a former chairman of the Securities and Exchange Commission, Arthur Leavitt, described the $85 billion government loan to AIG in return for 79.9 percent of its stock as a "controlled bankruptcy."

Mr. Dinallo confirmed that a Chapter XI bankruptcy filing would normally have been an appropriate way to deal with AIG's problems, since it was the lack of liquidity in the holding company--rather than any insolvency in AIG's operating insurance operations--that was causing the problems.

However, he said, such an action was ruled out because regulators were concerned "it would have created a perception in the eye of the public of problems"--a lack of confidence that could have prompted the frantic sale of AIG products by consumers, as well as a decision by commercial customers to switch their accounts to other insurers.

That would have eroded the value AIG would have received for its viable assets, he explained, and would have reduced the price that could be negotiated for its assets through an orderly sale--the purpose of the government bridge loan, delivered via the Federal Reserve.

Mr. Dinallo also criticized insurance executives, who, he said, "have gotten away from their core competence" by becoming involved in the acquisition of the speculative financial derivatives that laid AIG low. "They have to get better at focusing on their core competence," he said.

Moreover, he added, the lesson of AIG's problems is that more capital is needed at the holding company level, as well as in the operating insurance companies.

He also lauded the Federal Reserve because it acted in such a way as to protect insurance policyholders by not mandating the collateralizing of assets and surplus in insurance subsidiaries in order to secure the loan. Under the terms of the loan, entire affiliates, not their underlying cash assets, are securing the loan.

He disclosed that the reason a private solution--that is, a loan from a consortium of banks collateralized by AIG assets--could not be completed was that some of the insurance subsidiary assets were "given low evaluations" by the bankers as they perused AIG's books.

In the meantime, explaining a move to shore up AIG announced on Sept. 15 by New York Gov. David Paterson, state insurance regulators clarified that they would have allowed AIG to transfer up to $20 billion in liquid assets to the parent company to help with a liquidity crisis--but only if the loan was well collateralized and was part of a larger plan designed to have the company remain an ongoing business.

"Our main job is protecting policyholders--that is what we do," said an insurance department official. "We would allow AIG to move more salable assets to the parent company to provide liquidity only if the loan is well collateralized," said the official, who declined to be identified.

While such a transfer is probably no longer necessary with the Federal Reserve loan in place, Gov. Paterson emphasized that the offer had stabilized AIG's precarious financial position while negotiations for a more permanent solution continued.

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Dinallo To Lead NAIC's AIG Task Force

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