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Fed: AIG Insurance Subs Can Tap Credit Line

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American International Group Inc. has authority from the Federal Reserve Board to use the agency’s credit facility to provide liquidity for its insurance operating subsidiaries, the Fed says.

The Federal Reserve Bank of New York issued a bulletin earlier this week confirming that the insurance operations of AIG, New York, have access to the credit facility.

An official at the New York State Insurance Department, which is serving as the facility liaison for state regulators, the Fed and AIG, also confirmed that the insurance subsidiaries have credit facility access.

The New York Fed set up the $85 billion credit line Sept. 16 to help AIG meet collateral demands linked to credit default swaps.

AIG sold the contracts to insure financial institutions that invested in asset-backed securities.

The underlying securities dropped in value, and AIG’s credit ratings also deteriorated.

Because of the tightening credit markets and the cuts in AIG’s ratings, AIG faced new demands for collateral at a time when it was unable to turn to Wall Street to raise cash.

“We understand the importance of keeping AIG’s regulated subsidiaries–which include its insurance companies– well-capitalized, and will continue to work with their regulators,” the New York Fed says in the new bulletin. “Policyholders across the entire AIG family should take comfort from the fact that AIG’s regulated subsidiaries may be supported by, but are not obligated under, the Federal Reserve’s loan facility.”

Vincent Laurenzano, a lawyer with Stroock, Stroock & Lavan L.L.P., New York, and a long-time employee of the New York State Insurance Department, says the Fed is restating for public consumption its policy of not forcing AIG to siphon off funds from insurance subsidiaries to repay the credit facility loan.

“The bulletin is aimed at providing reassurance that federal intervention in AIG’s activities will be contained to the holding company,” Laurenzano says.

There will be no “demand that the company raid assets of its insurance companies to pay off debt,” Laurenzano says.


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