Chicago — Just as the implosions of Enron and WorldCom helped ease the way for the Sarbanes-Oxley Act of 2002, the news that the Federal Reserve is stepping in to save beleaguered American International Group (AIG) may have reverberations far beyond the company involved.
Indeed, new regulations that impact the financial services industry in general and the insurance industry in particular may be in the offing. House Financial Service Committee Chairman Barney Frank seemed to indicate as much in comments made on CNBC, saying “increased regulation” was necessary. Frank also has floated the idea of establishing a taxpayer-financed body like the Resolution Trust Corp., which liquidated failed savings and loans in the 1980s, might be needed in coming months to stabilize markets and prevent more implosions at major financial institutions.
When taken in consideration with the concurrent troubles of Lehman Brothers, Merrill Lynch, Fannie Mae and Freddie Mac, some say new federal regulations for the financial services industries are an inevitability.
“Companies have operated unfettered compared to what is going to happen to the financial services market,” Ellen Carney, a senior analyst at Cambridge, Mass.-based Forrester Research, told Insurance Networking News. “In terms of regulation, they haven’t seen anything yet.”
Whatever the eventual outcome, the preceding days have seen the fortunes of the world’s largest insurer swing wildly. The week started with AIG’s shares declining precipitously on fears that the company’s subprime exposure was similar in nature to Lehman Brothers. A raft of downgrades from Moody's Investors Service, Standard & Poor's, Fitch Ratings and A.M. Best after the market closed on Monday only heightened its plight. The company desperately sought a cash infusion in order to meet short-term liquidity needs, but was rebuffed in efforts in the private sector.
On Monday, Treasury Secretary Henry Paulson seemed to rule out federal intervention, and asked Morgan Stanley to help arrange private financing for AIG, while New York Governor David Paterson says AIG would be allowed to access $20 billion of its capital held in its subsidiaries, while it sought help elsewhere.
One place AIG did not want help from was from C.V. Starr & Co., the private firm run by former AIG CEO Maurice “Hank” Greenberg. On Tuesday, word emerged that Greenberg, the chairman of C.V. Starr & Co., and AIG’s largest shareholder, was considering a proxy battle to gain control of the company.
Yet by Tuesday night, despite Paulson’s earlier protestations, it was clear that the Federal government would intervene to rescue AIG. The plan, hatched by officials from the Treasury Department, the Federal Reserve and the New York State Insurance Department in a meeting at the Federal Reserve Bank of New York with AIG and representatives from other leading financial institutions, calls for AIG to receive a $85 billion loan in exchange for 79.9% equity stake in the company.
“We believe the loan, which is backed by profitable, well-capitalized operating subsidiaries with substantial value, will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis,” the company said in a statement. “We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets.”
Sources: Associated Press, INN archives
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