AIG Warned of 'Catastrophic' Failure

In a 21-page draft presentation, dated Feb. 26 and labeled "strictly confidential," company officials painted a grim set of possible scenarios, cautioning that its failure would cause a "chain reaction of enormous proportion."

The collapse, for instance, would strain the global insurance industry, hurt the value of the dollar and damage money-market funds, AIG warned. The company's failure, it added, would also erase taxpayers' existing investment in the firm and foster "doubts about the ability of the U.S. to support its banking system."

On March 2, the government announced that it would ease the terms of its existing loans to AIG and give the struggling company access to an additional $30 billion, raising the total rescue package to an estimated $170 billion. That same day, AIG posted a $61.7 billion loss for the fourth quarter of 2008, the largest such loss in U.S. corporate history.

The presentation "reflects months of dialogue between the company and various people in the government, really trying to understand the systemic risk," said an AIG official, who was not authorized to speak on the record.

Fed spokeswoman Michelle Smith said the central bank had "made its decision on its own analysis." Treasury spokesman Isaac Baker declined to comment.

In the presentation, AIG warned that its failure could provoke a "run on the bank" from its 74 million insurance customers around the world, causing other insurance firms to fail and leading to massive unemployment in numerous countries. It could also put "retirement savings significantly at risk" and cause "a loss of confidence in the private pension system in the U.S.," according to the document.

In addition, AIG said its demise could force European banks that bought exotic derivatives from the company's Financial Products division to have to raise $10 billion in capital and would put them at risk of ratings downgrades. Because AIG insures nearly every commercial activity -- from aviation to health-care providers to cargo shipping -- its failure could lead to a domino effect that "would cause turmoil in the U.S. economy and global markets," according to the company.

A collapse of AIG, the document stated, "could have similar or worse consequences on the global financial markets as that of the Lehman [Brothers] bankruptcy." Lehman, a once-powerful global investment bank, filed for bankruptcy protection in September after it failed to win a bailout from the federal government.

"What happens to AIG has the potential to trigger a cascading set of further failures which cannot be stopped except by extraordinary means," says the presentation, which was circulated among numerous federal and state regulators. "Permitting AIG to fail would be even more serious today than in September, especially in view of the support of the U.S. government. Public confidence in financial institutions is at a nadir and it is questionable whether the economy could tolerate another shock to the system that a failure of AIG would produce."

Lawmakers have expressed renewed ire after the government's latest bailout of AIG, ripping into Fed Chairman Ben S. Bernanke, Treasury Secretary Timothy F. Geithner and other federal officials during congressional hearings last week and demanding to know which AIG trading partners have benefited from taxpayer money. Members of the Senate Banking Committee criticized the company as "a bottomless pit," "a lost cause," and "a very disturbing story of malfeasance, incompetence and greed."

Federal officials themselves expressed frustration but insisted, as AIG did in its presentation, that the company was too large and important to fail.