American International Group Inc’s (AIG) US government rescue spared European banks from raising as much as US$16 billion in capital during the depths of the global financial crisis, a congressional panel said.
ABN Amro Holding NV and Danske Bank A/S, Denmark’s biggest bank, were among the firms that bought the most derivatives from AIG to trim reserves they held against investment losses, the Congressional Oversight Panel said last week in a report. ABN Amro may have had to raise US$3.5 billion if New York-based AIG was allowed to fail in 2008, and Danske Bank would have lost as much as US$2.1 billion in relief, the panel wrote.
‘NEARLY IMPOSSIBLE’
The banks “would’ve needed to come to the capital markets in a time when it would’ve been nearly impossible to raise that kind of capital,” said Jonathan Hatcher, a Jefferies Group Inc desk analyst and former Federal Deposit Insurance Corp bank examiner. “This was point-blank regulatory arbitrage, AIG lending out its credit rating so institutions could hold less real capital.”
CONSEQUENCES
The Federal Reserve Bank of New York weighed the consequences that an AIG failure would have on Europe’s largest financial institutions days before the September 2008 rescue, the panel said. The banks had bought credit-default swaps from AIG to cut the capital that regulators demanded be held against potential losses on about US$250 billion in securities tied to mortgages and corporate debt, according to the report.
The report shows which banks relied most on capital relief from the insurer. AIG had refused to disclose a list of the firms, according to the panel, which based its analysis on a document from the New York Fed with data as of Oct. 1, 2008. The insurer had named most of the banks, without disclosing the value of each firm’s coverage, in a confidential presentation to regulators as AIG appealed early last year for its fourth rescue.
CATASTROPHY
AIG said then that its failure may lead to credit rating downgrades of the banks, which “could result in catastrophic market disruptions.”
KFW Bank and Credit Logement SA each had US$1.9 billion in capital relief protected by AIG’s rescue, the panel said. Credit Agricole SA’s Calyon had US$1.6 billion, BNP Paribas SA had US$1.5 billion and Societe Generale SA had US$1 billion. Other unidentified firms had a total of US$2.4 billion.
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