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AIG’s Return to Securities Lending Carries Risks, Moody’s Says

American International Group Inc.’s resumption of securities lending at a life insurance division would carry risks for the company and be negative for bondholders, Moody’s Investors Service said today.

The bailed-out insurer may use securities lending at its SunAmerica business to enhance liquidity and benefit its tax planning, AIG said in a Nov. 3 filing. The life insurance business previously participated in a program that lent bonds in exchange for cash collateral, which was then used to buy mortgage assets. Losses from that initiative led, in part, to New York-based AIG’s government rescue in 2008.

“SunAmerica’s own securities lending mishap during the AIG financial crisis showed what can happen in a stress situation when things go awry,” Laura Bazer, a Moody’s analyst, said in a note. “The company faced a potential liquidity crisis when the value of its subprime and structured securities lending collateral investments plummeted.”

Chief Executive Officer Robert Benmosche, 67, is seeking to take advantage of assets that can be used to lower the insurer’s future tax bills. Losses on the previous securities lending program helped rack up more than $8 billion in so-called carryforwards that can be used to reduce capital gains taxes at SunAmerica. The assets expire from 2013 to 2015, according to a presentation on AIG’s website.

“Securities lending programs may be beneficial from a tax perspective,” according to the filing. “As part of SunAmerica’s risk management framework, it is evaluating and will deploy programs to enhance its liquidity position.”


A reinstatement of securities lending at SunAmerica is unlikely to be on the scale of previous efforts and will invest more conservatively, Bazer wrote. The securities-lending program peaked at about $94 billion, according to a report from the U.S. Government Accountability Office. Mark Herr, a spokesman for AIG, declined to comment.

AIG’s property-casualty unit Chartis already resumed securities lending. The business had $1.2 billion of securities on loan at the end of September, according to the filing. Other life insurers, including MetLife Inc. and Prudential Financial Inc., also run securities lending programs, said Bazer.

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