Forget the bonuses: AIG can't repay its loans, GAO says

McClatchy NewspapersMarch 18, 2009 

WASHINGTON — Lost in all the shouting over the $165 million in bonuses paid to executives of disgraced insurer American International Group was this sober message delivered to Congress on Wednesday by a government watchdog: AIG's ability repay its $170 billion in loans from taxpayers has eroded significantly.

Testifying before Congress, Orice Williams, the director of the Government Accountability Office's financial markets division, said that AIG has had only limited success in restructuring itself, despite more than $170 billion in federal aid in four separate bailouts since last September.

"AIG's ability to repay its obligations to the federal government also has been impaired by its deteriorating operations, its inability to sell its assets and by further declines in its assets," said a GAO report that was released with Williams' testimony.

When the Federal Reserve rescued AIG in September with an original $85 billion loan that gave the government a nearly 80 percent equity stake in the company, the intention was to prevent rating agencies from further downgrading AIG.

Ratings downgrades would've forced AIG to pay business partners much more collateral on a range of complex financial instruments, leaving one of the world's biggest insurers short of cash and thus technically insolvent. Insolvency could've triggered bank failures across the globe as the company's lightly regulated Financial Products division had obligations from its global transactions exceeding $1 trillion.

In exchange for the taxpayer bailout, AIG was to sell off its lucrative aircraft leasing businesses and other operations that weren't part of its core business of life, property and casualty insurance.

Williams, however, in prepared remarks for a House Financial Services subcommittee, said that "market and other conditions" have prevented significant asset sales and hampered restructuring.

"AIG faces ongoing challenges from the continued overall economic deterioration and tight credit markets," she said, according to the remarks.

Edward Liddy, AIG's caretaker chief executive, told the subcommittee that the company's insurance business remains strong but risks "atrophy" if problems aren't righted soon.

"It is not a failed company. It's a failing company, unless we do something about it," he said, pleading for patience.

Liddy also offered lawmakers a hard number that's long been the subject of speculation. He said the face value of the transactions made by its Financial Products division that still haven't been unwound — or paid off — is $1.6 trillion. That dwarfs the roughly $100 billion of taxpayer money that flowed back through to investment banks, hedge funds and other financial players to pay off bad bets by AIG.

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McClatchy Newspapers 2009

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