AIG still a major threat to global economy, top official says

McClatchy NewspapersMarch 20, 2009 

WASHINGTON — The operating chief of the American International Group unit whose collapse fueled Wall Street's meltdown said on Friday that the firm has made "enormous strides" in reducing its risky asset pool to $1.4 trillion, but it still poses major perils for the U.S. and global economies.

Gerald Pasciucco, a former Morgan Stanley vice chairman who took the job at the insurer's Financial Products subsidiary at the request of Federal Reserve officials, said that chilled credit markets and investor caution have made it difficult to dispose of many remaining assets.

"Risk aversion is our biggest enemy," Pasciucco told McClatchy in an interview. "Nobody trusts anyone. There's no liquidity. The credit market's absolutely frozen stuck."

He said that despite success in defusing some of the time bombs in the AIG unit's portfolio, it still could explode.

"If (AIG) blows up, what is going to be the impact on the global financial system? I think we're still a risk," Pasciutto said. "We're still enormous. It remains a large, complex, difficult-to-manage set of risks in an environment that is not particularly friendly."

The disclosure this week that more than 400 employees of the AIG subsidiary were paid a combined $165 million in bonuses after the firm got $170 billion in taxpayer dollars led to a nationwide uproar. In response, AIG Chairman and Chief Executive Edward Liddy asked employees to return at least half of their bonuses. The company said on Friday that "a large number" had committed to do so, but declined to be more specific.

Under subpoena, AIG has turned over a list of bonus recipients to New York Attorney General Andrew Cuomo, who hasn't yet identified any recipients publicly.

Pasciucco called the ruckus over the bonuses "an anomaly" and said he's glad he took the job as the company's chief troubleshooter.

AIG has already burned through nearly $100 billion in taxpayer loans. Much of the money flowed from the Treasury Department and Federal Reserve through AIG to other financial institutions around the world that bought insurance-like policies, known as credit-default swaps, from AIG Financial Products, to reduce their risks on bundles of subprime mortgages.

AIG and the Federal Reserve Bank of New York have drawn criticism from some quarters, including former New York Attorney General and Gov. Eliot Spitzer, for paying 100 cents on the dollar — full value — to settle those contracts. That effectively was a backdoor bailout of AIG's business partners, which include the largest U.S. and foreign banks — including Goldman Sachs, which itself got billions of dollars up front in federal bailout money.

Pasciucco declined to comment on the reasons that those firms weren't asked to accept lesser amounts on the contracts.

Upon taking over in November, Pasciucco said, he directed his staff to divide the unit's assets into 22 business lines, five of which have since been resolved. He said that taxpayer bailouts have reduced risks on some of the shakiest lines of credit-default swaps from $78 billion to $13 billion.

"The $50 billion value that we insured — we ended up paying about $40 billion on that," he said. "That's a big hole."

He said the company and its investment advisers think that loans insured by another batch of credit-default swaps are worth far more than they would fetch in today's bond market, but "it's not possible" to sell them at this point.

However, he said one European institution bought an entire line of assets, and a month and a half later it would have been worth "hundreds of millions of dollars less."

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McClatchy Newspapers 2009

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