AIG Borrows from Itself

The Governor of New York, possibly thinking about his tax base, and perhaps 30,000 jobs, has allowed AIG to borrow $20 billion from its subsidiaries.  Details are scant, but this can be one of three things:

  • AIG has surplus assets in its NY-domiciled subsidiaries in excess of their risk-based capital requirements.  If true, borrowing against these would be a no-brainer that should have been pursued long ago.  Favoring this view is the NY Governor, who says AIG is “extraordinarily solvent.”
  • AIG has surplus assets in its NY-domiciled subsidiaries, but not in excess of their risk-based capital requirements.  Borrowing against these would be a risky gamble, because it lowers the amount of risk margin available to absorb adverse deviations.
  • Some combination of both — say that AIG has only $15 billion in surplus assets in its NY-domiciled subsidiaries… $5 billion would reduce risk margins.

The risk here is that you end up with insolvencies of some of AIG’s subsidiaries.  Though poential losses to policyholders would be unlikely to be large, assessments would be made to other insurer though the state guaranty funds in order to keep policyholders whole, but potentially at a cost to the other insurers.

This has the potential to look really bright or really stupid, and in a short amount of time, too.  Final note: It’s not impossible, but I would be surprised if the Federal Government or the Federal Reserve intervenes on AIG when it would not with Lehman.