Q: What May Have Happened if AIG had Gone Bankrupt?

  • Davis Polk’s lawyer, Mr. Huebner, testified that it would have been a “very hard landing” for AIG, like cascading champagne glasses where secured creditors are at the top with their glasses filled first, then spilling over to the glasses of other creditors, and finally to the glasses of equity shareholders where there would be nothing left. Huebner, Tr. 5926, 5930-31;

Starr International Company, Inc. v. The United States - Case 1:11-cv-00779-TCW - Opinion and Order on Defendant's Motion to Dismiss - 49p

  • My role was to make it clear that whatever happened with the AIG parent company, policyholders and the funds set aside to pay their claims, would be protected. In my congressional testimony, I said that AIG's insurance companies had adequate reserves to protect policyholders.
    • Mr. Geithner does not contradict that.
    • What he does say is that a bankruptcy of the parent company would have caused problems for the insurance companies, policyholders, and the insurance market as a whole.
  • I agree.
    • If AIG had gone bankrupt, state regulators would have seized the individual insurance companies.
    • The reserves of those insurance companies would have been set aside to pay policyholders and thereby protected from AIG's creditors.
  • However, as Mr. Geithner correctly points out, AIG's insurance companies were intertwined with each other and the parent company.
  • Policyholders would have been paid, but only after a potentially protracted delay. It would have taken time to allocate the companies's assets.

2010 0202 - WSJ - Eric Dinallo - What I Learned at the AIG Meltdown: State Insurance Regulation Wasn’t the Problem - [link]

2014 1002 - Starr International Company, Inc. v. The United States - Case 1:11-cv-00779-TCW - Trial Volume 4 - Baxter - 249p

  • (p153-154) Q. And you've mentioned that there was a discussion about some of the systemic issues concerning AIG, and I assume what you mean there is if AIG were to go bankrupt. What were some of those systemic issues that were discussed, to your recollection?

  • 1 A. Yeah. The impact on 401(k) plans. The impact on other, other retirement plans that AIG had wrapped, that was another issue that came up. Stable value funds was another. I think I mentioned I remember a particular reference to teachers retirement plans. And the reason that I remember that is my wife is a New York City public school teacher, so I would have a much higher authority  to account for -- account to, rather.
  • 10 Q. Understood.
  • 11 A. And those were the kinds of things I remember. It would have been bad.
  • Mr. Cliff STEARNS - (R-FL).
    • Now, recently Michael McRaith, who is director of the National Association of Insurance Commissioners, told the Senate Banking Committee, he said, you know, if AIG had gone in bankruptcy, we would have taken care of it.
    • It would have been an orderly disposition.
      • This is what he said: ‘‘AIG’s insurance operations and their other companies would have simply—we would have simply bought up AIG’s insurance assets, allowing a seamless delivery of AIG’s insurance obligations.’’
    • So the question is, considering that the State Insurance Commissions would likely have seized AIG’s insurance subsidiaries, protected policyholders in an AIG bankruptcy, why was it necessary to bail out AIG with taxpayers’ money, based upon the testimony of the director of the National Association of Insurance Commissioners?
  • Mr. PAULSON. I respectfully disagree with him, and I believe that it is——
  • Mr. STEARNS.
    • So you disagree with this guy, with all his knowledge, his years of experience?
  • Mr. PAULSON.
    • I will just say many people with years of experience had some regulatory responsibilities with regard to AIG, but this company was had a huge problem, and it is case No. 1 on what is wrong with our regulatory system.
    • There was no single regulator that had a line of sight on the total company.
    • So there were regulators that looked at different pieces of it, and if the company had gone down, it would have been a huge mess. (p152)

2010 0127 - GOV (House) - The Federal Bailout AIG - [PDF-652p]

  • (p39 / 92) - 9.1 “The Failure of AIG Would Have Been Catastrophic for a Financial System Already in Free Fall.” (PTX 563 at 15; Geithner: Trial Tr. 1421:16-23).
    • Bernanke, Geithner, Baxter, Paulson, Alvarez
    • (e) Geithner: “In late 2008, AIG faced the prospect of default and bankruptcy, which would have had catastrophic consequences for the economy.
      • AIG was the largest provider of conventional insurance in the world, with approximately 75 million individual and corporate customers in over 130 countries.
      • If AIG had failed, the crisis would have almost certainly spread to the entire insurance industry.
      • The government took action to prevent AIG’s failure and to protect the financial system.
      • This included helping restructure the credit default swap contracts that AIG had entered into with various counterparties.” (PTX 563 at 3; see also Geithner: Trial Tr. 1425:14 – 1426:7).
    • (g) Bernanke: “AIG’s demise would be a catastrophe”. (PTX 599 at 77; see also Bernanke: Trial Tr. 1958:16-20).

Starr International Company, Inc. v. The United States - Case 1:11-cv-00779 - Document 428 - Plaintiff's Proposed Findings of  Fact - 573p 

Hank Paulson [continuing]. I believe it would have taken down the whole financial system and our economy.  -- It would have been a disaster.

  • Today, after all the actions that have been taken by the U.S. Government, we still have this terrible 10 percent unemployment level.
  • I believe that if the system had come down and failed, we could easily have had unemployment reaching or exceeding the 25 percent level we had in the Great Depression; we would have lost many additional billions of dollars in American savings; home prices would be much lower than they are today.

2010 0127 - GOV (House) - The Federal Bailout AIG - [PDF-652p]

  • Paul KANJORSKI. - (D-PA) -  Am I correct that there were discussions held at the highest echelons of the U.S. Government and the Congress at that very time as to whether or not law and order could be secured in the United States if we did not take precipitous actions to assure the people that the economic markets in the United States and the world would be held secure?
  • Treasury Secretary GEITHNER. I was not in the executive branch at that time, so I can’t speak to that, but it would not surprise me if that was the case.

2010 0127 - GOV (House) - The Federal Bailout AIG - [PDF-652p]

2016 - FOIA Request - GovernmentAttic.org - Records related to the Commodity Futures Trading Commission’s (CFTC) investigation into alleged manipulation of the Commodity Exchange, Inc (COMEX) silver market and other silver markets, September 2008 - 1226p

(p276) - 09/17/2008 06:29:08 l(b)(?)(C) MORGAN (J.P.) Message: The Banking Equivalent of The Cuban Missile Crisis.

Last night, the financial community dodged the equivalent of a nuclear mushroom sized bullet.

  • Why? Because the FED bailed out AIG.
  • What does AIG matter to the non-insurance financial community?
    • If AIG had gone under, the global banking community (and in particular, the European banking community) would have had to try to simultaneously raise vast sums of capital, in order to maintain their capital adequacy ratios.
    • According to AIG's regulatory filings, "Approximately $307bn (consisting of corporate loans and prime residential mortgages) of the $414bn in notional exposure of AIGFP's super senior credit default swap portfolio as of June 30, 2008 represented derivatives written for financial institutions, principally in Europe, for the purpose of providing regulatory capital relief rather than risk mitigation. In exchange for a minimum guaranteed fee.
    • The counterparties receive credit protection with respect to diversified loan portfolios they own, thus improving their regulatory capital position.
  • "So the long and the short of it is, if the FED hadn't bailed out AIG, we would have been witnessing the domino falling of European banks as their CDS blew out and it became instantly apparent that it simply isn't possible to raise tens of billions in additional capital in a market like this.
    • The missile carrying ships have not yet turned back, but at least we can be grateful that we aren't in Armageddon this morning.

09/17/2008 06:29:1611 ')(?)(C) ! MORGAN (J.P.) Message: some things are just to big to fail then