American International Group, in a confidential gloom-and-doom discussion paper obtained by National Underwriter, has warned government regulators that unless it is kept afloat, there would be "turmoil in the U.S. economy and global markets," with potentially "catastrophic" results.
The "strictly confidential" document–entitled "AIG: Is the Risk Systemic?"–has undergone several drafts. The one obtained by NU was dated Friday, March 6, and was prepared with government input, NU has learned.
After reporting a record $61.7 billion fourth-quarter loss to start the month, AIG announced that the terms of government support for the conglomerate were eased, with federal regulators agreeing to provide $30 billion in additional capital.
Such extreme measures are necessary, because what happens to AIG "has the potential to trigger a cascading set of further failures, which cannot be stopped except by extraordinary means," the firm argued.
"The failure of AIG would cause turmoil in the U.S. economy and global markets, and have multiple and potentially catastrophic unforeseen consequences," the company added.
"The inability of AIG to immediately secure additional assistance from the Federal Reserve and the Department of the Treasury threatens not only AIG's sales process but also consumer and business confidence around the world," the troubled firm said.
According to AIG's draft, "systemic risk is principally centered in the 'life insurance' business because it is this subsector that has the greatest variety of investments and obligations that are subject to loss of value of the underlying investments."
The company predicted that if it were to fail, "it is likely to have a cascading impact on a number of U.S. life insurers already weakened by credit losses. State insurance guarantee funds would be quickly dissipated, leading to even greater runs on the insurance industry."
While calling some of the potential consequences it was outlining "inherently judgmental and, to an extent, speculative," AIG said the bankruptcy of financial giant Lehman Brothers Holdings Inc. led to the unquestionable conclusion that "the adverse consequences of the failure of a major financial institution cannot be foreseen."
AIG argued that "just as the government was unable to predict" the implications of the failure of Lehman–such as its impact on the normally rock-solid money market industry–"the government would be even less capable of predicting the fallout of the collapse of a much larger, more global and more consumer-oriented institution such as AIG."
According to the draft obtained by NU, "AIG does not intend to update this Presentation following its distribution. Although AIG believes the information included in this Presentation is accurate, AIG makes no representation or warranty as to its accuracy or completeness."
AIG and New York Insurance Superintendent Eric Dinallo, who has received the draft, said they had no public comment on the report.
Despite AIG's pleas and support from regulators, the idea of more aid for the credit-default-swapping firm has received a hostile reaction from federal lawmakers.
Sen. Jim Bunning, R-Ky., at a March 5 Senate Banking Committee hearing told Federal Reserve Vice Chair Donald Kohn: "You will get the biggest 'no' you ever got. I will hold the bill. I will do anything possible to stop you from wasting the taxpayers' money on a lost cause."
Sen. Robert Menendez, D-N.J., said the Fed was asking for "an open-ended check" to save AIG that it would not get.
Meanwhile, Sen. Menendez asked federal and state regulators to look into whether AIG was able to use government bailout monies to engage in unfair price competition. Specifically, he said he wanted financial services regulators to authorize an "independent actuarial evaluation" of the pricing of AIG's property-casualty products.
In response, New York Superintendent Dinallo discounted the problem, noting the issue has been raised by others. "We have reviewed them," he said, adding that as a result, his department determined that the allegations of unfair competition "are subject to some debate."
Sen. Menendez said $170 billion in federal loans and credit AIG has secured from the federal government concern him because it creates the potential for AIG to underprice its products.
Equally important, he said, is that any underpricing could lead to huge liabilities, which in the future its competitors might be forced to assume if AIG can't be stabilized and its insurance units are placed in receivership.
He asked if anyone had done a stress test, similar to the one that large, troubled banking institutions are now undergoing, "to determine the viability of AIG's p-c units?"
Answering the question, Donald Kohn, vice chair of the Federal Reserve System, said that an evaluation of some of AIG's assets has been done, but not a stress test.
While questioning regulators about the AIG situation, Sen. Menendez noted that "the potential cost of bailing out AIG–the cost of systemic risk–has to be quantifiable." And the next question people are asking, he added, is this: "When is the fifth bailout of AIG coming, and how much more will it cost us?"
"We must determine what AIG's assets are really worth," he said.
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