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Nation Probably Won't Be Fully Repaid By AIG

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The Associated Press

Published: March 17, 2009

Pressure is mounting on the government to revise its bailout of AIG to ensure that taxpayers are repaid as much as possible of the $170 billion lent to the troubled insurer.

Experts warn against expecting to get much back.

The problem stems from AIG's obligations to its trading partners. So far, the hobbled insurance giant has honored its contracts with U.S. and foreign banks. It has paid out more than $90 billion in taxpayer money to keep some of the biggest names in finance from losing money on bad bets linked to subprime mortgages and other risky assets.

As the cost of the rescue swells, experts say it's becoming harder to envision a scenario in which the government could recoup its full investment. Even though the AIG payouts to major banks have angered critics of the bailout, it might be legally impossible to claw back any of the billions already doled out.

"A contract is a contract," said Russell Walker, a risk management professor at Northwestern University. "That money all went to people who bought protection from AIG."

The government agreed to uphold those contracts when it seized control of American International Group in September. It argued that failing to repay the debts of the globally interconnected company could cause catastrophic losses at big international banks, potentially toppling the financial system.

Scrutiny of AIG's dealings with its trading partners comes after revelations during the weekend that the insurer planned to pay millions in executive bonuses.

President Barack Obama on Monday accused AIG of recklessness and greed. He pledged to try to block the bonuses, which AIG insists it contractually is obligated to pay.

Obama's aggressive stance toward the AIG bonuses raises the question of whether the government could pursue the billions paid to AIG's trading partners.

Asked if he would favor trying to see whether the AIG contracts could be broken so the government could recover some of the payouts, Rep. Barney Frank, chairman of the House Financial Services Committee, stopped short of endorsing the idea. But he said "that's something that has to be examined."

"I would want to know the consequences of not paying those debts," said Frank, D-Mass.

Other critics want the government to go further. They say AIG's trading partners should be forced to take less than 100 percent of the value of their derivatives contracts with AIG. They noted that the protection AIG offered was unregulated and that AIG's trading partners knew the risks and should have to assume some losses.

BANKS RECEIVING PAYOUTS
American International Group Inc. used more than $90 billion in federal aid to pay on contracts with foreign and domestic banks, some of which had received multibillion-dollar U.S. government bailouts. The money went to banks to cover losses on complex mortgage investments as well as for collateral needed for other transactions.

•Goldman Sachs - $12.9 billion

•France's Societe Generale - $11.9 billion

•Germany's Deutsche Bank - $11.8 billion

•Britain's Barclays - $8.5 billion

•Merrill Lynch - $6.8 billion

•Banks receiving $1 billion to $3 billion: Citigroup Inc., Switzerland's UBS AG and Morgan Stanley.

The Associated Press

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