Baird Webel
Specialist in Financial Economics
American International Group (AIG), one of the world’s major insurers, was the largest direct recipient of government financial assistance during the recent financial crisis. At the maximum, the Federal Reserve (Fed) and the Treasury committed approximately $182.3 billion in specific extraordinary assistance for AIG and another $15.9 billion through a more widely available lending facility. The amount actually disbursed to assist AIG reached a maximum of $184.6 billion in April 2009. In return, AIG paid interest and dividends on the funding and the U.S. Treasury ultimately received a 92% ownership share in the company. As of December 14, 2012, the government assistance for AIG ended. All Federal Reserve loans have been repaid and the Treasury has sold all of the common equity that resulted from the assistance.
Going into the financial crisis, the overarching AIG holding company was regulated by the Office of Thrift Supervision (OTS), but most of its U.S. operating subsidiaries were regulated by various states. Because AIG was primarily an insurer, it was largely outside of the normal Federal Reserve facilities that lend to thrifts facing liquidity difficulties and it was also outside of the normal Federal Deposit Insurance Corporation (FDIC) receivership provisions that apply to banking institutions. September 2008 saw a panic in financial markets marked by the failure of large financial institutions, such as Fannie Mae, Freddie Mac, and Lehman Brothers. In addition to suffering from the general market downturn, AIG faced extraordinary losses resulting largely from two sources: (1) the AIG Financial Products subsidiary, which specialized in financial derivatives and was primarily the regulatory responsibility of the OTS; and (2) a securities lending program, which used securities originating in the state-regulated insurance subsidiaries. In the panic conditions prevailing at the time, the Federal Reserve determined that “a disorderly failure of AIG could add to already significant levels of financial market fragility” and stepped in to support the company. Had AIG not been given assistance by the government, bankruptcy seemed a near certainty. The Federal Reserve support was later supplemented and ultimately replaced by assistance from the U.S. Treasury’s Troubled Asset Relief Program (TARP).
The AIG rescue produced unexpected financial returns for the government. The Fed loans were completely repaid and it directly received $18.1 billion in interest, dividends, and capital gains. In addition, another $17.5 billion in capital gains from the Fed assistance accrued to the Treasury. The $67.8 billion in TARP assistance, however, resulted in a negative return to the government, as only $54.4 billion was recouped from asset sales and $0.9 billion was received in dividend payments. If one offsets the negative return to TARP of $12.5 billion with the $35.6 billion in positive returns for the Fed assistance, the entire assistance for AIG showed a positive return of approximately $23.1 billion. It should be noted that these figures are the simple cash returns from the AIG transactions and do not take into account the full economic costs of the assistance. Fully accounting for these costs would result in lower returns to the government, although no agency has performed such a full assessment of the AIG assistance. The latest Congressional Budget Office (CBO) estimate of the budgetary cost of the TARP assistance for AIG, which is a broader economic analysis of the cost, found a loss of $15 billion compared with the $12.5 billion cash loss. CBO does not, however, regularly perform cost estimates on Federal Reserve actions.
Congressional interest in the AIG intervention relates to oversight of the Federal Reserve and TARP, as well as general policy measures to promote financial stability. Specific attention has focused on perceived corporate profligacy, particularly compensation for AIG employees, which was the subject of a hearing in the 113th Congress and legislation in the 111th Congress.
Date of Report: August 14, 2013
Number of Pages: 21
Order Number: R42953
Price: $29.95
To Order:Specialist in Financial Economics
American International Group (AIG), one of the world’s major insurers, was the largest direct recipient of government financial assistance during the recent financial crisis. At the maximum, the Federal Reserve (Fed) and the Treasury committed approximately $182.3 billion in specific extraordinary assistance for AIG and another $15.9 billion through a more widely available lending facility. The amount actually disbursed to assist AIG reached a maximum of $184.6 billion in April 2009. In return, AIG paid interest and dividends on the funding and the U.S. Treasury ultimately received a 92% ownership share in the company. As of December 14, 2012, the government assistance for AIG ended. All Federal Reserve loans have been repaid and the Treasury has sold all of the common equity that resulted from the assistance.
Going into the financial crisis, the overarching AIG holding company was regulated by the Office of Thrift Supervision (OTS), but most of its U.S. operating subsidiaries were regulated by various states. Because AIG was primarily an insurer, it was largely outside of the normal Federal Reserve facilities that lend to thrifts facing liquidity difficulties and it was also outside of the normal Federal Deposit Insurance Corporation (FDIC) receivership provisions that apply to banking institutions. September 2008 saw a panic in financial markets marked by the failure of large financial institutions, such as Fannie Mae, Freddie Mac, and Lehman Brothers. In addition to suffering from the general market downturn, AIG faced extraordinary losses resulting largely from two sources: (1) the AIG Financial Products subsidiary, which specialized in financial derivatives and was primarily the regulatory responsibility of the OTS; and (2) a securities lending program, which used securities originating in the state-regulated insurance subsidiaries. In the panic conditions prevailing at the time, the Federal Reserve determined that “a disorderly failure of AIG could add to already significant levels of financial market fragility” and stepped in to support the company. Had AIG not been given assistance by the government, bankruptcy seemed a near certainty. The Federal Reserve support was later supplemented and ultimately replaced by assistance from the U.S. Treasury’s Troubled Asset Relief Program (TARP).
The AIG rescue produced unexpected financial returns for the government. The Fed loans were completely repaid and it directly received $18.1 billion in interest, dividends, and capital gains. In addition, another $17.5 billion in capital gains from the Fed assistance accrued to the Treasury. The $67.8 billion in TARP assistance, however, resulted in a negative return to the government, as only $54.4 billion was recouped from asset sales and $0.9 billion was received in dividend payments. If one offsets the negative return to TARP of $12.5 billion with the $35.6 billion in positive returns for the Fed assistance, the entire assistance for AIG showed a positive return of approximately $23.1 billion. It should be noted that these figures are the simple cash returns from the AIG transactions and do not take into account the full economic costs of the assistance. Fully accounting for these costs would result in lower returns to the government, although no agency has performed such a full assessment of the AIG assistance. The latest Congressional Budget Office (CBO) estimate of the budgetary cost of the TARP assistance for AIG, which is a broader economic analysis of the cost, found a loss of $15 billion compared with the $12.5 billion cash loss. CBO does not, however, regularly perform cost estimates on Federal Reserve actions.
Congressional interest in the AIG intervention relates to oversight of the Federal Reserve and TARP, as well as general policy measures to promote financial stability. Specific attention has focused on perceived corporate profligacy, particularly compensation for AIG employees, which was the subject of a hearing in the 113th Congress and legislation in the 111th Congress.
Date of Report: August 14, 2013
Number of Pages: 21
Order Number: R42953
Price: $29.95
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