GAO Probing If U.S. Cash Gives AIG An Unfair Edge

WASHINGTON--The Government Accountability Office has launched a probe into whether American International Group's federal funding lifeline is providing it with an unfair advantage in the pricing of commercial insurance products.

The probe was launched at the request of Rep. Paul Kanjorski, D-Pa.., chairman of the Capital Markets Subcommittee, and Rep. Spencer Bachus, R-Ala., ranking member of the parent House Financial Services Committee. The pair disclosed their request on Friday night, several hours after the GAO announced its plans.

In addition to a look at market competition, they said they had also asked the GAO to investigate what the likelihood is that the government will recoup the billions it has loaned to AIG in exchange for a 79.9 percent government interest.

Specifically, they asked the 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 were "particularly interested in your analysis of any setbacks experienced as well as any challenges projected in recouping federal taxpayer funds," the letter said.

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

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 of troubled MBS through 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.

Spokesmen for representatives of two large trade groups representing property-casualty insurers said they welcomed the probe.

And, an official of the Property Casualty Insurers Association of America (PCI) used the occasion to argue that the government shouldn't provide funds under the Troubled Asset Relief Program for insurers who have become bank holding companies or thrifts in order to obtain cash under the program.

Five insurers--most of them life but one, Hartford Insurance Group, Hartford, Conn., with a large presence in the p-c business--have applied for TARP.

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 aid.

Another prerequisite is to agree to acquire and recapitalize troubled thrifts or banks. An application for a thrift charter, by Genworth Financial, Richmond, Va., is awaiting approval by the Office of Thrift Supervision.

"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 spokesman.

"As such, property-casualty insurer participation in a Treasury relief program is neither necessary nor in the best interest of property-casualty consumers," Mr. Brown added.

"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," he added.

Blain Rethmeier, a spokesman for the American Insurance Association, 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."

Mr. Rethmeier added, "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, Mr. Rethmeier said, "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."

Disclosure of GAO plans to probe the impact of the AIG bailout on the marketplace was made in a survey of the TARP program.

The report said that while a decision by the Treasury Department to provide a monthly update on who and how the TARP funds are being used "is a step toward greater transparency and accountability for the largest institutions," GAO continues to believe that "additional action is needed to better ensure that all participating institutions are accountable for their use of program funds."

In its comments about the issue, the GAO disclosed that "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."

The comments about AIG were included in a report that updated GAO's continuing efforts to evaluate the government's handling of TARP, a $700 billion program aimed at helping distressed U.S. companies stay in business.

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

According to the report, AIG was among the first companies to receive aid under the program.

Most of the funds have been given to financial institutions, although some money has been provided to automobile manufacturers, and the Obama administration has promised to use some of the funds to stabilize the housing market directly.

In their letter seeking the study, Rep. Kanjorski and Rep. Bachus said they were concerned that there have been "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 Bank 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," they said.

"We are particularly interested in your 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," they added.