The U.S. Government Accountability Office has launched a probe into whether American International Group's federal bailout is providing its insurance subsidiaries with an unfair competitive advantage in the pricing of commercial policies.

The probe was launched at the request of Rep. Paul Kanjorski, D-Pa., chair of the Capital Markets Subcommittee, and Rep. Spencer Bachus, R-Ala., ranking member of the parent House Financial Services Committee. Disclosure of GAO's plans to probe the impact of the AIG bailout on the insurance marketplace was made in a report on the TARP program.

GAO said it was "assessing, among other things, any impact of the assistance to AIG on insurance markets and to determine, to the extent possible, whether the rescue package has achieved its desired goals."

A representative for AIG said the company would "fully cooperate with the AIG study."

In their letter seeking the study, Rep. Kanjorski and Rep. Bachus said they were concerned by "troubling reports" that federal help to AIG may be creating "market distortions" in the commercial property-casualty market because of the efforts by U.S. Treasury and the Federal Reserve to provide loans and other financial support to shore up AIG's capital position.

"Specifically, we are requesting that the GAO undertake to assess the impact of all aspects of the AIG financial rescue package on the U.S. insurance marketplace," Rep. Kanjorski and Rep. Bachus said. "Seeking input from a variety of industry sources, as well as economists and state insurance regulators, should be an important part of your inquiry."

The pair said they are "particularly interested" in GAO's assessment of "whether market distortions are occurring now or may occur in the future, especially in the commercial property-casualty market, and whether any such distortions are having a negative impact on market discipline and fair competition."

In addition to a look at market competition, they said they had also asked GAO to investigate what the likelihood is that the government will be repaid for the billions it has loaned to AIG.

Specifically, they asked GAO to determine "whether or not the AIG rescue package has resulted in measurable progress toward achieving the federal government's stated goals and objectives." They said they are "particularly interested in your analysis of any setbacks experienced as well as any challenges projected in recouping federal taxpayer funds."

AIG was provided various government loans in return for a 79.9 percent stake in the company under an agreement with the Treasury Department and Federal Reserve.

The government is currently providing $38 billion in cash to AIG and is helping the company through various other programs. This includes injections of cash in return for troubled assets, such as mortgage-backed securities and liabilities incurred through insuring such assets via credit default swaps.

The Federal Reserve Board is also guaranteeing the commercial paper of AIG's International Lease Finance unit, one of the world's largest leasing companies.

Representatives of two property-casualty insurer groups welcomed the probe. In addition, an official of the Property Casualty Insurers Association of America used the occasion to argue that the government shouldn't provide funds under the Troubled Asset Relief Program for insurers that have become bank holding companies or thrifts in order to obtain federal funds.

Five insurers--most of them life but one, Hartford Insurance Group, with a large presence in the p-c business--have applied for TARP funds. Four, including Hartford, have been given approval by federal financial services regulators to establish either bank holding companies or thrift holding companies as a means of securing the TARP aid.

"We believe that the property-casualty industry is generally well-capitalized and managed, and is continuing to provide sound and secure products to consumers," said Cliston Brown, a PCI representative. "As such, property-casualty insurer participation in a Treasury relief program is neither necessary nor in the best interest of property-casualty consumers."

He added that it is "inappropriate for TARP funds to be obtained by thrifts for the purpose of subsidizing property-casualty insurer affiliates, directly or indirectly, and if there is a study, we hope that this situation will be carefully reviewed."

A representative for the American Insurance Association, Blain Rethmeier, said "it is essential for Congress to exercise its oversight responsibility to ensure that the government's intervention does not result in any outcomes that distort private markets and create conflicts with the government's role as market regulator."

He added that "in circumstances like the AIG situation, where the government takes a controlling stake in the company and provides it with capital, it is particularly important to ensure that the capital is used for well-defined and tightly controlled purposes."

If the government does not ensure that the provision of capital tracks with these purposes, warned Mr. Rethmeier, "this capital could be used for other unintended purposes, such as gaining market share of financial institutions that are accessing private capital at market rates, presenting a substantial risk of market distortion and competitive advantage."

In related news, disclosure that AIG paid more than $450 million in bonuses last year to retain employees at its troubled Financial Products Group is stirring more outrage against the company on Capitol Hill.

However, an AIG representative defended the action, saying it was necessary to keep the business running after the executive in charge was dismissed in March--long before the company's dire need for a federal bailout became necessary.

Moreover, the AIG official said, the payments were a contractual obligation.

In a statement, Rep. Kanjorski expressed "outrage" at AIG. "Despite AIG's fall from grace, it still just does not get it," he said. "Fortunately, there is a new sheriff in town, and the Treasury Department must work to fix this problem promptly."

He said he has the support of Rep. Barney Frank, D-Mass., chair of the Financial Services Committee, to convene hearings to examine the issue.

He called reports of bonuses--totaling about $450 million, paid to 400 AIG Financial Products workers based in London and Wilton, Conn.--"simply outrageous."

"We are in extremely difficult economic times, and AIG knows this from personal experience," Rep. Kanjorski said. "I have already personally told AIG's chairman [Edward M. Liddy] that this decision is mind-boggling and wrong. AIG needs to reverse course. AIG should be at the beck and call of the taxpayers, but instead it continues to play games behind our backs."

Rep. Elijah Cummings, D-Md.--who also has severely criticized AIG retention bonuses, as well as its decision to wine and dine top agents at expensive resorts after accepting funds from the government--met with AIG officials in Washington about two weeks ago, according to Christine Pretto, an AIG representative. She said they had a "good, cordial meeting."

A representative for Rep. Cummings, Jennifer Kohl, did not respond to a request for details concerning the meeting.

Ms. Pretto said the retention program was undertaken after the March dismissal of Joseph Cassano, the head of the AIG Financial Products unit that nearly destroyed the company by selling credit default swaps on subprime mortgage-backed securities. Mr. Cassano was terminated after the company disclosed a $5.29 billion net loss.

The financial products business was founded in 1987 by ex-employees of Drexel Burnham Lambert, the securities firm that helped popularize "junk-bond" investing before it collapsed.

"We adopted this contractual retention program nearly a year ago and disclosed it in our 2008 quarterly [Securities and Exchange Commission] filings," Ms. Pretto said.

At that time it was clear, she said, "given the market environment, that we would need to retain employees to manage the complex issues arising in our Financial Products business, which we are now unwinding."

Ms. Pretto said AIG is eliminating nearly $800 million of deferred compensation to AIG Financial Products employees due to the unit's losses. "Ensuring we have the right people to unwind this complex business--including $2.1 trillion of notional swap transactions as of the end of 2007--efficiently for the benefit of taxpayers remains a key company goal," she said.

She said the company is "committed to full transparency" and that, in consultation "with our government stakeholders, we will continue to honor our legal obligations while exercising prudent financial practices to ensure we accomplish our main goal: repaying the government loan as soon as possible."

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GAO Checking If Bailout Gives AIG Unfair Pricing Edge On P-C Insurance

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