- The Washington Times - Tuesday, September 16, 2008

CHARLOTTE, N.C. | American International Group Inc. will be allowed to use $20 billion of assets held by its subsidiaries to provide cash needed for the troubled insurer to stay in business, New York Gov. David Paterson said Monday.

AIG continues to review its operations and discuss alternatives with outside parties, reportedly including Warren Buffett’s Berkshire Hathaway Inc., to improve its business amid concern that the world’s largest insurer could need up to $40 billion to shore up its balance sheet.

Mr. Paterson asked New York state insurance regulators to essentially allow AIG to provide a bridge loan to itself. The governor has also asked the head of New York’s insurance department to talk with federal regulators about providing an additional bridge loan to AIG.

“AIG still remains financially sound,” Mr. Paterson said.

The move will allow AIG to use those assets as collateral to borrow cash to fund its day-to-day operations, Mr. Paterson explained.

It also helps AIG by “giving them what they need most, which is time,” said Keefe Bruyette & Woods analyst Cliff Gallant, who added that the relaxation of insurance regulations is “unprecedented.”

A state insurance commissioner’s priority typically is to protect the policyholder, and that includes making it difficult for an insurer to access the funds that are used to pay claims.

AIG could face significant claims from Hurricanes Ike and Gustav, which have battered the Gulf Coast, but even as bad as they are, “AIG is a big company, and I would expect they will be able to meet their claims,” Mr. Gallant said.

“Those events do not cause an immediate cash problem for the company,” he added.

If an insurer cannot pay their claims, the state’s insurance fund, which is backed by other insurance companies who do business in the state, would help pay off policyholders.

“If anyone’s been put at risk, it’s the other insurance companies who do business in the state,” Mr. Gallant said.

AIG has been battered over the past year by billions of dollars of losses tied to deterioration in the mortgage and credit markets.

According to news reports, New York-based AIG was seeking $40 billion in emergency funds - possibly from the Federal Reserve - to help the insurer avoid a credit rating downgrade, which would make it more expensive for AIG to raise money. AIG already has raised $20 billion in new capital this year.

Also, the insurer was said to be in “rescue” talks with Mr. Buffett.

Berkshire Hathaway spokeswoman Jackie Wilson said Mr. Buffett was not available Monday to comment on the AIG-rescue reports. Berkshire typically does not comment on any deals before they are completed.

On Friday, Standard & Poor’s warned that it could cut AIG’s credit rating by one to three notches because of concerns that AIG will have difficulty accessing capital in the short term.

AIG is in a precarious position, in part because of a potential downgrade to its credit ratings and how that would affect its portfolio of financial instruments known as credit default swaps. The swaps are essentially insurance coverage to protect investors against defaulting bonds or debt.

For the three quarters ended in June, AIG lost about $25 billion in the value of credit default swaps and about $15 billion on other investments, such as mortgage-backed securities, which are bonds backed by a pool of mortgages.

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