KEY POINTS:
Barely a couple of days after letting Lehman Brothers slide into oblivion, the US Federal Reserve is to tip the equivalent of New Zealand's annual economic output into insurer American International Group to ensure its survival.
US Treasury Secretary Henry Paulson who earlier this week said he "never once considered that it was appropriate to put taxpayer money on the line" to save Lehman Brothers, said yesterday: "I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect taxpayers".
As well as having traditional insurance businesses, albeit ones that operate around the world including New Zealand, AIG does business with almost every financial institution in the world and insures US$88 billion worth of assets including mortgages and corporate loans.
The Fed's bailout, $129 billion in kiwi dollar terms, is only slightly less than New Zealand's annual GDP of $136 billion.
"AIG's a bit more important than Lehman," said Victoria University professor of economics and finance Roger Bowden yesterday.
"There's more of a systemic risk element to the whole thing."
Bowden said AIG had been active in insuring financial institutions, including banks, against losses on loans and other transactions.
That insurance allowed those banks to economise on the amount of capital they are required to hold by regulators.
"So what happens is if AIG - probably the world's largest operator in this field - falls over? Then the banks all of a sudden have to try and raise more capital. That would be a huge stress on capital markets round the world right now and the banks will have to pay a lot more for it."
Had it been allowed to fail, AIG might well have proved to be the channel through which the current financial crisis, reckoned to be at least the worst since 1929, became thefull-blown economic crisis the world now fears.
AIG , which has 6 per cent of New Zealand's life insurance market and 8 per cent of general insurance, moved to reassure its clients late yesterday.
"The trading position of the group's general insurance arm remains strong," said AIG New Zealand chief executive Rob Ryan.
Meanwhile, the New Zealand Superannuation or "Cullen" Fund yesterday downplayed the impact of Lehman Brothers' collapse and the AIG bailout, which dilutes existing shareholders' interests, on its portfolio.
Its direct equity and bond holding in Lehman Brothers amounted to 0.028 per cent of the fund while its AIG exposure totalled 0.076 per cent. Based on available data that works out to about $4 million and $11 million respectively. Figures of that size would be dwarfed by wider losses as a result of the financial turmoil.
