WASHINGTON–American International Group has authority from the Federal Reserve Board to use the agency's credit facility to provide liquidity for its insurance operating subsidiaries, the Fed said Monday.
The clarification was issued by the New York Fed and was confirmed by an official of the New York Insurance Department, which is serving as liaison on the facility between state regulators, the Fed and the company.
It is the first time the Fed has clarified its policies regarding use of the $85 billion credit facility since it was provided Sept. 16 to help AIG deal with a liquidity crisis stemming from the need to provide additional collateral to counterparties in which it had entered into credit default swaps.
These contracts were sold by AIG's holding company as a form of insurance to financial institutions and others which had purchased mortgage-backed securities. These securities are now declining in value, and because of tightening credit markets, AIG at the time was unable to raise new cash to provide the collateral.
"We understand the importance of keeping AIG's regulated subsidiaries–which include its insurance companies– well capitalized and will continue to work with their regulators," the New York Fed said in the bulletin.
"Policyholders across the entire AIG family should take comfort from the fact that AIG's regulated subsidiaries may be supported by, but are not obligated under, the Federal Reserve's loan facility," the bulletin concluded.
Vincent Laurenzano, a lawyer with Stroock, Stroock & Lavan in New York and a longtime employee of the New York Insurance Department, interpreted the bulletin as the Fed restating for public consumption its policy of not forcing AIG to siphon off funds from an insurance subsidiary in order to repay the loan.
"The bulletin is aimed at providing reassurance that federal intervention in AIG's activities will be contained to the holding company and the Fed will not mandate repayment from assets of insurance subsidiaries, nor demand that the company raid assets of its insurance companies to pay off debt," Mr. Laurenzano said.
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