Hour of Reckoning

AIG reported expenses

Ahead of a US congressional hearing scheduled for Wednesday, where AIG CEO Edward Liddy will speak, the company has revealed how the bailout funds are being used. According to official data, in 2008 the insurer transferred $90 billion to fulfill obligations to its partners, we are talking about the payment of collateral for credit default swaps, as well as the repurchase of bonds and other securities. The recipients of the funds were Deutsche Bank ($11.8 billion), Societe Generale ($11.9 billion), Barclays ($8.5 billion), Merrill Lynch & Co. ($6.8 billion), Bank of America ($5.2 billion), UBS ($5 billion). According to the information released, the largest transactions were made in relation to Goldman Sachs, which raised $12.9 billion, which caused a wave of discussions among officials. “I strongly believe that Goldman Sachs received such a significant amount of money given the nature of its relationship with the insurance company,” said Congressman Elijah Cummings. “We will definitely conduct an investigation to be sure that this is a simple coincidence.” As you know, the decision to rehabilitate AIG was made by former Goldman Sachs executive director Henry Paulson, who also appointed Edward Liddy to the post of head of the insurance company. According to market participants, this played a role in determining the size of payments.

However, AIG’s relations with contractors were not the only thing that attracted the attention of the authorities in the information released. It turned out that the insurance company continues to pay bonuses to its employees. Late last week, the insurer transferred $165 million to employees in its financial products division, according to Reuters. Meanwhile, the mistakes of this department in 2008 cost AIG $40.5 billion in losses.

The incentives drew sharp criticism from Treasury officials, the Federal Reserve and President Barack Obama. "It's hard to see what warrants paying any bonuses to AIG's financial products division employees at all, let alone $165 million," the president said yesterday. “How is such an outrageous act justified to the taxpayers who keep the company afloat?” Mr. Obama asked Treasury Secretary Timothy Geithner to “use all available leverage and pursue all legal avenues to block the payment of these bonuses.” According to the president, this is “not just about dollars and cents,” but about the “fundamental values” of the United States. In his speech, he noted that the company was on the verge of bankruptcy due to its own “negligence and greed.”

As you know, last fall AIG, finding itself in a difficult financial situation due to the credit crisis, turned to the US government for help. As a result, the insurer was allocated $173.3 billion in exchange for government agencies’ access to its share capital (currently 80% of AIG is owned by the state). After changing the ownership structure, the insurer began to actively get rid of its divisions around the world in order to pay off debt to the US authorities. In early January, AIG ceded its Canadian asset Life Insurance Company of Canada to the financial group BMO for $308 million. It is expected that the division of AIG Investments (it has $114 billion under management) - International Lease Finance Corp., focused on aircraft leasing, as well as another Asian division engaged in life insurance - American Life Insurance Company. The possibility of selling one of the most successful divisions of the insurer, American International Assurance Company (AIA), operating in Asia, is also being considered. To optimize costs, AIG refused to sponsor the Manchester United football club and the Davis Cup international tennis competition.

Following the disposal of its assets, the group is expected to focus on insurance in the US.

Georgy VORONKOV