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Geithner: AIG Still Matters

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WASHINGTON — The federal government has to continue to help American International Group Inc., Treasury Secretary Timothy Geithner said today.

“The financial system still cannot withstand the failure of AIG,” Geithner warned at a Senate Banking Committee hearing on the performance of the Troubled Asset Relief Program.

The government, company managers and company directors must work to separate the troubled derivatives operations of AIG, New York, from the viable insurance units, Geithner testified.

Sen. Richard Shelby, R-Ala., the highest-ranking Republican on the Senate Banking Committee, called AIG a “black hole.”

The government “keeps pumping billions of dollars into it,” and it “still seems to be hemorrhaging money,” Shelby told Geithner.

Some say AIG’s viable assets “were worth more 6 months ago than they are now,” Shelby said. “Geithner, you have got the bear in the house. What are you going to do about it?”

Geithner ruled out forcing AIG’s derivatives transaction counterparties to take haircuts.

It would be “incredibly difficult for us to negotiate effectively to reduce the value of those claims,” Geithner said.

All involved “have no option now to selectively diminish the value of those claims without taking risk that you would have default,” Geithner warned.

The process of winding down the derivatives transactions arranged by AIG’s AIG Financial Products unit is about half done, with the notional value of the deals cut to $1.5 trillion, from $2.7 trillion, Geithner reported.

“There’s no doubt that this company — not just to the Fed and the Treasury, but to it’s board and management–proved much more complicated, much more risky than people thought, and has proved much harder to disentangle and separate,” Geithner said. “You can’t feel more strongly than me about the need to get the government out of this company, [to] get the company to the point where it poses less risk to the system and those underlying insurance businesses are on a path where they can be viable going forward.”