Treasury Defends AIG Assistance

A new report from the U.S. Treasury Department defends the controversial troubled asset relief program (TARP) and the assistance given to New York-based American International Group.

The report, "Troubled Asset Relief Program—Two Year Retrospective," concludes that had the Federal Reserve and Treasury not intervened to save AIG in September 2008, the results would have been catastrophic. 

Indeed, the report claims that if AIG had failed, the crisis would have “almost certainly spread to the entire insurance industry” and its failure would have had a much broader impact on the economy than the implosion of Lehman Brothers. 

“AIG’s failure would have directly threatened the savings of millions of Americans,” the report states. “AIG had provided financial protection to municipalities, pension funds, and other public and private entities through guaranteed investment contracts and products that protect participants in 401(k) retirement plans. Doubts about the value of AIG life insurance products could have generated doubts about similar products provided by other life insurance companies, and opened an entirely new channel of contagion and panic.”

The report also praises efforts AIG’s recently announced plan to expedite payback of the assistance it has received. One part of the three-pronged plan involves the U.S. Treasury Department converting $49.1 billion of the preferred shares it holds in AIG into common shares to be sold on the open market.

AIG is also ramping up divestments. AIG is selling one of its Asia-based units, American Life Insurance Co. (ALICO) to New York-based MetLife  for $15.5 billion. In September, AIG announced that it has entered into a definitive agreement to sell its Japan-based life insurance subsidiaries, AIG Star Life Insurance and AIG Edison Life Insurance, to Newark, N.J.-based Prudential Financial Inc., for a total purchase price of $4.8 billion, In August, AIG and New York-based Fortress Investment Group LLC announced an agreement under which Fortress will acquire 80% of American General Finance Inc., AIG’s consumer credit division for an undisclosed sum.

AIG is also planning an initial public offering of Asia-based American International Assurance (AIA) on the Hong Kong stock exchange later this year.

“Upon completion of the restructuring plan, AIG will be a simplified life, property/casualty insurer with solidly capitalized insurance subsidiaries, adequate liquidity, and a stable balance sheet,” the report states. “The plan is still subject to a number of conditions, and much work remains to be done to close the transactions.  Nevertheless, the plan reflects the substantial progress that AIG and the government have made in restructuring the company and reducing the systemic risk that it once posed.  The plan also represents a significant step towards ending the government’s role in providing assistance to the company.”

Of the $180 billion in assistance provided to firm, Treasury estimates that the combined cost of TARP programs and other Treasury interests in AIG will ultimately be about $30 billion.