AIG - Main Issues

2016 0916 - FRB - Meeting of the Federal Open Market Committee - 85p

(p5) - MR. DUDLEY: Of course, we also have the issue of AIG.

The AIG problem is at least starting as a liquidity crisis.

  • The problem with AIG is that the parent company doesn’t have a lot of liquidity resources and doesn’t have easy ability to funnel liquidity up from their subsidiaries because most of the subsidiaries are regulated entities.
  • So AIG is running into two problems:
    • One, they are unable to roll their commercial paper and, two, as their ratings are downgraded—they were downgraded by Moody’s yesterday, I think from AA minus to A minus, but don’t quote me on that—they have to post a lot more collateral against their derivatives exposures and also with respect to their GIC (guaranteed investment contract) business.
    • So AIG is in a situation in which the parent is basically going to run out of money—today, tomorrow, Thursday, or very, very soon.
    • Now we say it’s a liquidity thing, but a lot of times when people look closer at the books they find out that the liquidity crisis may also be a solvency issue.
    • I think it is still a little unclear whether AIG’s problems are confined just to liquidity.
      • It also may be an issue of how much this company is really worth.