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AIG’s Tentacles Widespread

Courtesy of The Denver Post…

"The nation’s largest insurer was No. 13 on the 2007 Fortune 500 list of largest U.S. companies, with revenues of $110 billion. Its operations directly affect 80 percent of the U.S. population, and the company also operates in 130 countries, Melicher said. (Ronald Melicher, chair of the finance division of the University of Colorado’s Leeds School of Business)

A critical issue for AIG is its deep involvement in insuring bank loans, including hundreds of billions of dollars’ worth of home mortgages. An AIG bankruptcy could wipe out those insurance contracts, causing the value of the insured mortgages to fall and bringing more distress to the financial industry.

‘There was concern that many U.S. banks would fail if AIG did not keep operating,’ Melicher said. ‘AIG is just monstrous.’

Finally, AIG bonds are widely held by money-market funds, which came under tremendous stress last week with the Lehman bankruptcy and other developments.

The AIG bailout has been called a bridge loan by some and a nationalization by others. The $85 billion loan has a two-year term and an interest rate of just under 12 percent – terms the government said will encourage AIG to move quickly to sell assets and repay the loan. The government replaced AIG’s chief executive and took warrants that give it the right to nearly 80 percent ownership of AIG."

According to the Wall St. Journal, AIG insurance policy holders don’t need to panic. While the holding company is in financial distress, AIG’s insurance subsidiaries are separate entities that are financially sound. If an insurance company were to fail, each state runs an insurance guaranty association to protect policyholders.