Despite a March GAO report recommending that American International Group Inc. seek concessions from stakeholders including management, employees and derivatives counterparties, Treasury Secretary Timothy Geithner testified before the Senate Banking Committee that no haircuts are forthcoming.

Committee chairman Sen. Christopher Dodd asked Geithner why the Treasury Department has not required any concessions from AIG counterparties. “While I except the arguments about systemic risk, I find it hard to understand why we have to go on indefinitely paying off these companies at 100% if AIG is not worth 100%,” Dodd said. “Where is the negotiation?”

Geithner acknowledged that it was “hard to explain why it is necessary or fair” to pay the counterparties in full, but cited a lack of regulatory mandate and the ongoing specter of systemic risk.

“We have no option now to selectively diminish the value of those claims without taking risks that would result in default,” he said. “I don’t believe the system today could withstand the risk of this institution to fail to meet its obligations. I wish this were not the case.”

Geithner also stressed a need to maintain the viability the company’s insurance operations.

“We are working very hard with the trustees and the Fed and management of that company for them to put in place a restructuring plan that will de-risk the riskiest part of the institution and preserve and separate those underlying insurance businesses which are very good businesses still,” he said. 

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