The $123 billion liquidity lifeline the federal government is providing to American International Group might not be enough to keep the company going given the credit crunch still hamstringing the economy while it tries to sell off enough assets to pay back taxpayers, Chairman and CEO Edward Liddy warned.

Mr. Liddy made his comments in an Oct. 22 interview with Ray Suarez on the Public Broadcasting System's “News Hour with Jim Lehrer,” where he explained that the company's collateralized debt obligations are weighing heavily on its liquidity.

He said AIG is in the process of cutting costs as it seeks to preserve cash, while at the same time looking to pay off its government loan by selling assets in a market environment that continues to get worse. “Clearly, we'd prefer to be doing this asset sale a year ago or two years ago rather than right now, but I think there will be plenty of excellent demand for what are really very, very good assets,” he said.

At last count, the Federal Reserve Board reported that AIG had borrowed $90.3 billion. Of that figure, $72.3 billion came from the original $85 billion loan fund set up by the government on Sept. 17 in exchange for 79.9 percent of the company's stock, according to Joseph Norton, an AIG representative.

The other $18 billion was provided via a second, $37.8 billion deal with Washington struck in early October, which permitted the Federal Reserve to borrow investment-grade, fixed-income securities from AIG in return for cash collateral.

In his PBS interview, Mr. Liddy explained that the $18 billion from the lending facility is in exchange for quality securities owned by AIG's life insurance units, and is in lieu of commercial paper the company would normally sell to provide cash but which now is nearly impossible to market because of the credit crunch.

“Because there's no commercial paper around right now, it's a liquidity facility where we give the Federal Reserve assets, [and] they give us cash,” Mr. Liddy said.

Most of the cash the Fed is providing is being employed to provide collateral for the credit default swaps the company sold through its now-shuttered AIG Financial Products subsidiary, based in London, according to Mr. Liddy.

Specifically, he said that to the extent the credit markets remain tight, “and we have to keep posting collateral–as it's called in the vernacular in the industry–it's possible [the government loan funds set aside thus far] may not be enough.”

This collateral is “primarily in the financial products area, where as the value of those assets goes down–maybe they're residential mortgages or what have you–as they go down, we have to keep filling up the bathtub to make certain that the assets that we've underwritten remain the same,” he explained.

“So, if the value goes down, you have to make it up with something. We make it up by writing a check,” Mr. Liddy said. “So we've had to write more and more checks to keep the bathtub full.”

In his TV interview, Mr. Liddy–who came aboard after the original loan deal was put into place–said that all things considered, “it was a wise decision on the part of the Federal Reserve and Treasury to throw that lifeline to AIG so that we could emerge from this crisis in an orderly way.”

He added that “AIG touches an awful lot of other financial companies around the world with the credit default swaps and some of the financial products which you alluded to earlier,” arguing that “anyone who thinks we didn't need the Federal Reserve as a lifesaver simply doesn't understand the precarious nature of where we were.”

Special Reports /

AIG Might Need More Gov't Support In Tight Credit Market

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