Page last updated at 19:14 GMT, Thursday, 5 March 2009

AIG failure 'would hurt others'

AIG sign
AIG has announced the biggest quarterly loss in US history

Foreign investors' desire to deal with US firms might have waned if the US government had not bailed out AIG, a Federal Reserve official has said.

Federal Reserve vice-chairman Donald Kohn told the lawmakers that "we need AIG to be stable".

Meanwhile, senator Richard Shelby called the insurer "the greatest corporate failure in American history".

AIG, which is in effect owned by the government, on Monday reported a $61.7bn (44.1bn) quarterly loss.

The figure, for the last three months of 2008, is the biggest quarterly loss in US history.

It was also announced on Monday that the company would get another $30bn from the government, bringing the overall sum of taxpayers' money available to AIG to $180bn, the biggest bail-out by far of any US company.

It turned out that the problems were deeper, the financial markets were a lot worse, became a lot worse, and the whole situation deteriorated badly
Donald Kohn, Federal Reserve vice-chairman

Mr Kohn told a Senate banking committee hearing that there were more than enough AIG assets, even at low prices, to repay Fed loans.

The company first received financial assistance from the government in September in the wake of Lehman Brothers' collapse.

Now the Treasury Department holds up to 79.9% of AIG.

Risks

Scott Polakoff, acting director of the Office of Thrift Supervision, said that there was the need to create a systemic risk regulator to monitor companies as large and complex as AIG, as a "multitude of regulators" had missed the warning signs at AIG.

Mr Kohn said: "No one was minding the whole company and looking at how things interacted, and whether the whole company would, under some circumstances, put the financial system at risk."

Meanwhile, committee chairman Christopher Dodd said that the lack of transparency and accountability in the government's management of the AIG bail-out was "rather stunning".

"Throughout the entire fourth quarter last year, it was frankly never clear who owned AIG or who was in charge."

AIG: QUICK FACTS
30 million US policy holders
Operates in 130 countries
Provides insurance to 100,000 companies and other entities

Mr Kohn defended the Fed's decision to pay, rather than guarantee, AIG's credit default swaps, which provided insurance for corporate bonds.

AIG plays a key role in insuring risk for financial institutions around the world.

"We thought it was a short-term liquidity situation - in mid-September this is what we thought - and that if we could bridge this situation with liquidity, then the company could make the adjustments to keep itself a going concern," he said.

"It turned out that the problems were deeper, the financial markets were a lot worse, became a lot worse, and the whole situation deteriorated badly."

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