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AIG Sees Excess Capital Under Stress Test

Source: WSJ - Erik Holm

Posted on 24 Feb 2012

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American International Group Inc. estimates it may have up to $10 billion in excess capital under criteria that could be used by the Federal Reserve as it runs new stress tests of key financial institutions.

The estimate of AIG's Tier 1 capital, a measure of capital adequacy used by regulators, shows that Fed requirements "may not be a binding constraint" for the insurer as it looks to return capital to shareholders in the years ahead, Chief Executive Robert Benmosche said on a conference call with analysts and investors Friday.

AIG ran its own stress test in an effort to simulate the scrutiny it expects from the Fed, though the company said it doesn't know the exact methods regulators will use for the stress tests, Mr. Benmosche said. The company concluded it would have a Tier 1 capital ratio of about 8%, he said.

The Fed is conducting the stress tests before deciding whether firms can boost their capital returns to shareholders.

The conference call was held after AIG released fourth-quarter results Thursday afternoon. The company reported profit of $19.8 billion in the latest period, thanks to a large tax benefit.

Mr. Benmosche also said that AIG had purchased "only" about $2 billion of securities from Maiden Lane II, a Fed vehicle that was created during the financial crisis to take on mortgage-backed securities from AIG's securities lending business. The Fed has been selling off those assets to recoup a $19.5 billion loan it provided to Maiden Lane II in 2008 to purchase the mortgage bonds from AIG.

AIG had at one point hoped to repurchase all the mortgage securities held by Maiden Lane II, but the Federal Reserve Bank of New York elected to sell them off in smaller chunks to a variety of buyers. Once it learned that it couldn't buy the whole portfolio outright, AIG found "better-quality credits" from other sources, which limited how much it purchased from Maiden Lane II, Mr. Benmosche said.