AIG losing ability to pay back $170B, official says

McClatchy Newspapers

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 to pay back its $170 billion in loans from taxpayers has eroded significantly.

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

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

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

Ratings downgrades would have 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 have 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 a broad swath of its lucrative aircraft leasing businesses and other operations that weren’t tied to its core business of life insurance and 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 has 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 — stands at $1.6 trillion.

That number 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.