NU Online News Service, Oct. 26, 3:28 p.m. EST
WASHINGTON—A new Government Accountability Office report about the federal rescue of American International Group shows there was vigorous debate about whether the Federal Reserve should provide assistance to the insurer, and what the state-level and international implications would have been should the government not act.
The report says proposals to bail out AIG were first strongly opposed by Timothy Geithner, now Treasury secretary. He was president of the Federal Reserve Bank of New York.
According to the GAO, Geithner was concerned about the Federal Reserve providing money to a company it did not regulate, as well as "moral hazard" issues.
Geithner was later castigated for his actions involving AIG during various House hearings, including calls for his resignation.
Another reason the Federal Reserve was reluctant to provide aid was "out of concern an emergency loan would send negative signals to the market."
Because the "Federal Reserve system was not AIG's regulator, it could not have known the full depth of the company's problems prior to AIG's Sept. 12 warning" of an imminent need to file bankruptcy, Geithner has said.
At that time, AIG said it had liquidity concerns regarding its ability to comply with provisions of its credit default swap contracts.
AIG's major problems stemmed from the sale of insurance policies on mortgage-backed securities through credit default swaps by AIG's Financial Products subsidiary.
According to the GAO, "A former senior AIG executive [said to us] that had AIG's crisis occurred before that of Lehman Brothers, the Federal Reserve System would have not provided any assistance to AIG, which would have led to its failure."
As for the company's property and casualty business, when initial aid was being debated in September 2008, a FRBNY advisor told the GAO that "there were questions of whether AIG could survive a bankruptcy proceeding because the company had built its business model on long-term customer confidence."
The GAO report adds, "For example, the advisor noted that during the fall of 2008, customers were saying they would not renew their coverage without a solution in place to address AIG's problems."
In addition, the GAO says FRBNY officials voiced concern that seizures of AIG's insurance subsidiaries by state insurance regulators following a bankruptcy filing "would have complicated any efforts to rescue the company because AIG's businesses were interconnected in areas such as operations and funding."
Therefore, the GAO says, "according to the officials, discrete seizures by individual state insurance regulators would have made bankruptcy unworkable."
In addition, the report says that "foreign authorities were becoming concerned, and bankruptcy could have resulted in insurance regulators worldwide seizing hundreds of AIG entities.
"According to the officials, they looked at the experience of previous insurance company failures, but none were comparable to AIG's situation," the GAO report says.
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