U.S. Lawmaker Says AIG Failure Would ‘Bring Down Europe’

The U.S. government rescued giant insurer American International Group in part because its collapse would dramatically hurt European banks, a senior Democratic lawmaker said Thursday.

The U.S. government has bailed out AIG three times since Sept. 16 and committed about $180 billion to keep the insurer alive and doing business.

“One of the reasons we had to rescue AIG was the fact that it was going to bring down Europe,” Pennsylvania Rep. Paul Kanjorski told reporters after his subcommittee held a hearing on systemic risk.

Later, in an interview with Reuters, Kanjorski said he was told that a large number of AIG’s counterparties were European. “That’s why we could not allow AIG to fail as we allowed Lehman (Brothers) to fail, because that would have precipitated the failure of the European banking system,” he said.

Some lawmakers are pushing the Federal Reserve and Treasury Department to reveal AIG’s counterparties and have expressed frustration over the secretive nature of the government bailouts.

At a Senate Banking Committee hearing earlier in the day, chairman Christopher Dodd, a Democrat, criticized what he called a “stunning” lack of transparency and accountability about exactly where the billions in rescue money have gone.

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IJ Ed. Note: While Congressman Kanjorski is properly concerned with the threat to European banks following a failure of AIG, there are other reasons for the U.S. government’s continued support of the giant insurer.

Firstly, it now owns 80 percent of AIG. If it fails, the government – and ultimately the U.S. taxpayer – loses that investment. In other words – “in for a dime, in for a dollar.”

There’s also a second, and even more menacing scenario, cited by several analysts and commentators. If the holding company were allowed to fail it would seriously impact the banks, as the article points out. But it could trigger a loss of faith from AIG policyholders – particularly in the life and pension sector – where, it’s estimated, AIG companies have over 300 million policies in force, worth trillions of dollars. A surge to cash in those policies for their cash value – the equivalent of a “run on the bank” – could put so much financial pressure on AIG’s life and pension subsidiaries that they would collapse. AIG’s P/C companies would also suffer, as policyholders sought more secure coverage elsewhere. This could, and probably would, put the entire insurance industry at considerable risk of a global meltdown.

Nobody’s happy with the enormous cost of bailing out AIG. But given the possible consequences of not bailing out AIG, there seems to be little choice.