PEORIA -- Illinois residents who have insurance products with companies associated with AIG, American Insurance Group, are safe, a spokeswoman for the Illinois Department of Insurance said on Thursday, Sept. 18.
The federal bailout of AIG contains a provision forbidding the company from borrowing from its subsidiaries, spokeswoman Susan Hofer said.
Asked whether Illinois will allow any borrowing, Hofer responded, "no."
Before the bailout, New York had given permission for AIG to borrow from subsidiaries in that state.
There are no federal regulations for insurance, only state regulations.
AIG owns VALIC, a Houston, Tex.- based insurance company and likely other companies doing business in Illinois.
AIG-connected insurance products include policies and annuities which many retirees, including former state employees, depend on.
Hofer said insurance companies in Illinois must maintain adequate reserves to serve their policyholders, and are not allowed to invest in risky securities. Instead they must invest in AAA-rated government backed bonds and the like, she said.
Still -- the quasi-government mortgage companies Fannie Mae and Freddie Mac were rated AAA before they required a government bailout.
If a company in Illinois fails, Hofer said, "policy holders come first."
Hofer said her agency employees more than 200 people to oversee the insurance companies.
Do we believe what state officials say, in a state that wants to close its parks and historic sites while wasting money on other projects that could wait? Do we have a choice?
Author Steve Pizzo, who with others wrote "Inside Job," the definitive book on the greed and malfeasance that led to the savings and loan crisis or more than a decade ago, has offered the best explanation in plain language of the AIG crisis. He wrote:
"In case you don't know what AIG does that's so important it required Treasury to nationalize it, here's a hint. One of the biggest, and most lucrative, products of AIG is asset insurance which they sell to banks. Asset insurance works like this:
"Regulations require federally insured banks to maintain a baseline percentage of their assets as a cushion in case some of their loans go bad. Banks hate that, because they can get better returns loaning money than holding it.
"Enter AIG which sells banks insurance policies to replace a bank's regulatory capital with an insurance policy promising to produce that now missing capital in the event the banks borrowers default.
"The bottom-line, AIG's policies allow banks to maintain far less capital on hand than regulations require.
"You might have noticed there's a lot of defaulting going around right now... a lot more than AIG or their bank customers ever imagined, and a lot more defaulting and asset value write downs than AIG can possibly cover, because, you see, AIG doesn't have enough ready capital itself. (Remember this the next time McCain complains about "burdensome government regulations." You might want to ask him precisely which regulations he would eliminate as president.)
"So, if AIG failed, all those banks out there that replaced their regulatory capital with AIG IOUs would be in deep, deep, deep, deep, doo doo. If AIG failed the feds would be faced with the possibility -- growing daily into a probability -- of having to virtually nationalized a huge number of banks and S&Ls, replacing AIG's IOUs with USA IOUs. (Yugo Chavez and Fidel Castro would get a good laugh out of that.)"
A good explanation of what's really going on. Without that federal AIG bailout, banks would start to fall, like dominoes.
If you want a more complete but complicated explanation, see this New York Times story.
Meanwhile, here's a little free advice, probably worth what you pay for it: where you can do so without penalties, transfer or roll over cash brokerage accounts into bank CDs, guaranteed by the FDIC. Your broker should be able to do that for you quickly.
Stocks and mutual funds in your name should be safe, though they can crash and fall to be worth nothing. At least AIG or its bedfellows can't take that away by "borrowing."
As Sen. Obama has so famously said, "in an ownership society, you're on your own."
-- Elaine Hopkins
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