AIG rescue funds wind up in Colorado
Colorado’s cut of the more than $170 billion in federal bailout funds that American International Group received comes to $360 million.
That is what AIG claims to have funneled to customers in the state from Sept. 16 ” when the federal government rescued the world’s largest insurer ” to the end of last year. Colorado’s allotment falls within a $12.1 billion slice that AIG funneled to local municipal-bond issuers for what are known as guaranteed investment contracts, or GICs.
When a school district, housing authority or transportation department issues bonds, they typically park the money in an investment vehicle to earn interest until it is needed, said Christopher Johns, portfolio manager of the Tax Free Fund of Colorado.
AIG used its AAA credit rating to issue GICs without collateral. But once problems with derivative contracts it issued caused a rating downgrade, counterparties demanded their funds back, and AIG had to post collateral.
CollegeInvest, which underwrites student loans, requested and received the $14 million that it had with AIG, said Debbie Demuth, director of CollegeInvest.
“Because of the downgrade, they weren’t an allowable option,” Demuth said. “These are dollars for students; we didn’t want to put them at risk in any way.”
The Colorado Housing and Finance Authority received $88.8 million of its money invested with AIG on Sept. 24, said Tom Hemmings, chief financial officer at the housing bond authority.
“The investment contracts themselves called for collateral to be posted in the event their rating fell below a certain level,” Hemmings said. “You were investing based on their credit rating.”
The downgrade gave the CHFA the right to demand its money back, which in hindsight was the right move, he said.
The irony is that municipal issuers were willing to accept a slightly lower rate of return to get the safety implied in the AIG name, Johns said.
“AIG was considered one of the highest-quality providers of GICs in the marketplace,” he said.
AIG didn’t release the names of GIC investors. A check by The Denver Post found CHFA and CollegeInvest, but they account for only about 28 percent of the $360 million.
Not everyone trusted AIG. The city of Denver had a prohibition on using GICs, said Bob Gibson, director of financial management.
Colorado’s share of GIC reimbursements through the bailout funds ranked sixth among all states, after California, Virginia, Hawaii, Ohio and Georgia.
Staff writer Steve Raabe contributed to this report.