Why was AIG Bailed Out?

We are writing to correct a misstatement by Treasury Secretary Timothy Geithner at the Joint Economic Committee’s November 19, 2009 hearing, titled “Financial Regulatory Reform: Protecting Taxpayers and the Economy.”

  • Secretary Geithner asserted that the reason for the federal government’s bailout of AIG was a fear that AIG might not have been able to pay claims to its insurance policyholders.
    • That flies counter to the Treasury Department’s long-held assertion that the bailout was needed to prevent financial loss to AIG’s counterparties in its credit default swap (CDS) transactions.
  • It also belies the facts. AIG’s state-regulated insurance subsidiaries were, and still are, safe and solvent.
    • Money to pay policyholders was protected from being used for other purposes, and was never at risk.
    • That is because of to state insurance regulators’ ability to “ring fence” solvent insurance entities of a group to shield them from the parent’s corporate losses or bankruptcy in order to protect consumers.
  • This change in rationale by Secretary Geithner is confusing at best, misleading at worst.

2009 1120 - NAIC to GOV - Carolyn B. Maloney, Chair
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The company’s failure would directly threaten the savings of millions of Americans to whom it had provided financial protection through investment contracts and products that protect participants in 401(k) retirement plans.

  • AIG was one of the largest life and property/casualty insurance providers in the United States.
  • The withdrawal of such a major underwriter at the time risked creating a void for millions of households and businesses for basic insurance protection.
  • And doubts about the value of AIG life insurance products could have generated doubts about similar products provided by other life insurance companies, feeding the panic that was crippling the economy.  (p52)

-- Geithner

2009 1119 - JEC - Joint Economic Committee