Old News Now - AIG taken over by Taxpayers

If you watched cable news or surfed the internet tonight, a version of this headline (from Bloomberg.com - By Hugh Son, Erik Holm and Craig Torres) was all over the place: "AIG Gets $85 Billion Fed Loan, Cedes Control to Avoid Collapse."

The official press release from AIG's website is as follows:

Sept. 16, 2008--The Board of Directors of American International Group, Inc. (NYSE:AIG) issued the following statement in response to today's announcement by the Federal Reserve Board that the Federal Reserve Bank of New York is providing a two-year, $85 billion secured revolving credit facility to AIG that will ensure the company can meet its liquidity needs:

"The AIG Board has approved this transaction based on its determination that this is the best alternative for all of AIG's constituencies, including policyholders, customers, creditors, counterparties, employees and shareholders. AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues. We believe the loan, which is backed by profitable, well-capitalized operating subsidiaries with substantial value, will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis. We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets. In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG.

"We commend the Federal Reserve and the Treasury Department for taking this decisive action to address AIG's liquidity needs and broader financial market concerns. We thank them for their leadership during this critical time for the global financial markets. We also thank Governor Paterson, Commissioner Dinallo, Commissioner Ario, the other state Commissioners, and the Office of Thrift Supervision for their willingness to assist AIG.

"Policyholders of AIG companies around the world can rest assured that AIG's commitments will continue to be honored."

It should be noted that the remarks made in this press release may contain projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to management, operations, products and services, and assumptions underlying these projections and statements. It is possible that AIG's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these projections and statements. Factors that could cause AIG's actual results to differ, possibly materially, from those in the specific projections and statements are discussed in Item 1A. Risk Factors of AIG's Annual Report on Form 10-K for the year ended December 31, 2007, and in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of AIG's Quarterly Report on Form 10-Q for the period ended June 30, 2008. AIG is not under any obligation (and expressly disclaims any such obligations) to update or alter its projections and other statements whether as a result of new information, future events or otherwise.

American International Group, Inc. (AIG), a world leader in insurance and financial services, is the leading international insurance organization with operations in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, financial services and asset management around the world. AIG's common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo.


CONTACT: American International Group, Inc.
Charlene Hamrah (Investment Community)
212-770-7074
or
Nicholas Ashooh (News Media)
212-770-3523

SOURCE: American International Group, Inc.

There are millions of 401(k) and 403(b) participants whose accounts are administered by AIG VALIC (collectively AIG Retirement Services). I am sure there are burning questions in their minds as to the safety of their accounts.

Participants in plans administered by AIG might be a little relieved to note that their accounts are safe. AIG had a press release tonight to help address some of these concerns. The text of the release is as follows:

NEW YORK--Sept. 16, 2008--American International Group, Inc. (AIG) today said that AIG's life insurance, general insurance and retirement services businesses, including its extensive Asian operations, continue to operate normally and remain adequately capitalized and fully capable of meeting their obligations to policyholders.

AIG continues to pursue alternatives to increase short-term liquidity in the parent company. Those plans do not include any effort to reduce the capital of any of its subsidiaries or to tap into Asian operations for liquidity.

The insurance policies written by AIG companies are direct obligations of its regulated subsidiary insurance companies around the world. These companies are well capitalized and meet or exceed local regulatory capital requirements. The companies continue to operate in the normal course to meet obligations to policyholders. In particular, AIG noted its long tradition of service in Asian markets, which are key to AIG's future growth. Founded in Shanghai in 1919, Asia is home to some of AIG's oldest and most valued clients.

The AIG companies are fully committed to maintaining required capital levels in all of its subsidiaries and to meeting the needs of their customers around the world.

American International Group, Inc. (AIG), a world leader in insurance and financial services, is the leading international insurance organization with operations in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, financial services and asset management around the world. AIG's common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo.

CONTACT:
American International Group, Inc.
News Media:
Nick Ashooh, 212-770-3523

Investment Community:
Charlene Hamrah, 212-770-7074

WSJ Journal Report - When 401(k) Investing Goes Bad

Jennifer Levitz reported in the Wall Street Journal's Journal Report [subscription required] last week, "When 401(k) Investing Goes Bad - Teachers in West Virginia offer a valuable lesson for what not to do".

Ms. Levitz chronicles the story of how West Virginia's school districts jumped on the participant-directed defined contribution bandwagon 17 years ago with disastrous consequences for employees.

"It was horrible," says Judy Hale, president of the West Virginia Federation of Teachers union. Most felt poorly informed, and they invested too conservatively, putting the largest sums of money into a fixed-rate annuity, a safe but low-yielding option that typically is inadequate for building a nest egg.

As employees began to retire, most balances were pitifully small."

Of course the solution to their problems was an "old fashioned" pension plan!

So on July 1, after a vote authorized by the state legislature, 14,871 school employees, or 78%, switched to the old-fashioned pension plan.

Trouble with AIG VALIC:

The West Virginia plan initially offered stock and bond mutual funds, a money-market fund, and an annuity, in this case from Variable Annuity Life Insurance Co., or Valic, a unit of American International Group Inc. In addition to the Valic annuity, current offerings include funds from Capital Group Cos.' American Funds unit, Federated Investors Inc., Fidelity Investments and Franklin Resources Inc.From the start, most employees favored the annuity. Some say they were swayed by Valic's sales force, which included former educators and school employees who went into the schools during the workday to talk about the option. "These people came during your lunch or during your planning period basically to sell the program," says Debra Elmore, a third-grade teacher in Ansted, W.Va.

Ms. Elmore acknowledges knowing little about investing. "Oh, Lord no," she says. "I had no idea." She set up her account so that 85% of her contributions would go into the fixed-rate annuity. "I just thought, 'Well, these are safe. Let's stay there.' "

We will come back to Ms. Elmore's comment in a minute...

AIG spokesman John Pluhowski says the insurance company hires former school employees to sell its products to schools "because the education market is important to us; educators know the needs and concerns of educators." He says the representatives were "not authorized or directed to give investment advice; they were only authorized to sell a fixed-annuity contract."

Anne Lambright, executive director of the state's retirement board, says that the board offered "some general education" about investing to employees, but that "not everyone took advantage of it." She acknowledges that advice was limited and that much of the information employees received was probably from the companies selling the products. "I'm not sure how much information they got in terms of comparison between products or stocks and bonds," she says.

At one point, about two-thirds of all assets in the plan were invested in the fixed-rate annuity, according to the board's annual reports. For the first two years, the annuity offered an annual return of 8.5%, but then it dropped to 4.5%, according to a state official. Mr. Pluhowski says the 4.5% is the guaranteed minimum return, while the higher percentage was based on then-market conditions.

By 2005, complaints from employees and the union about low balances in the defined-contribution plan had mounted. State officials closed the plan to new participants and reopened the pension plan to new hires. The following year, school employees voted on whether to end the defined-contribution plan, but a state court later deemed the vote unconstitutional because those satisfied with the plan would have been forced to return to the old-fashioned pension plan. This spring's election was couched differently: Workers voluntarily could elect to transfer their account into the old pension plan, provided that at least 65% of current employees wanted the transfers to be permitted.

The threshold easily was cleared -- in part because as of April 30 the average account balance in the defined-contribution plan was $41,478, and of the 1,767 employees over the age of 60, only 105 had balances of more than $100,000. "Our members were going to run out of money five or six years into retirement," says Ms. Hale of the teachers union.

Some retirement experts say another problem that surfaces in 401(k) plans is the "red-truck syndrome": Plan participants use some of their nest egg at retirement to buy something they always dreamed of having. Teresa Ghilarducci, an economist at the New School for Social Research in New York, says many workers take their 401(k) in a lump sum and have difficulty making it last. She says the West Virginia case "shows the nation what is wrong with everyone's 401(k)," including a lack of investment knowledge and fiscal discipline.

Long-time readers would recognize Ms. Ghilarducci who we noted on July 7th when she appeared on NPR's Fresh Air program promoting her new book, When I'm Sixty-Four: The Plot Against Pensions and the Plan to Save Them."


Back to our main topic today, needless to say, there's a state investigation into whether VALIC made misrepresentations to induce state employees to invest into its annuity...

Now back to Ms. Elmore's comment. In a letter to the editor in the Journal today, Ernest Jordan writes from Florida:

All employers should learn from your article "When 401(k) Investing Goes Bad -- Teachers in West Virginia Offer a Valuable Lesson for What Not to Do" (The Journal Report on Investing in Funds, Aug. 4) the need to focus on employee education and employer fiduciary oversight. There were ways to stave off these issues years ago.

It is shameful that AIG's Variable Annuity Life Insurance Co., or Valic, takes a hit to their reputation for doing exactly what they were contracted to do by West Virginia: provide the conservative investment option in the defined-contribution plan.

This all sounds like sour grapes to me. I only have 401(k) investments for my personal retirement. It is up to me to contribute enough and invest the money in a way to ensure that I have what I need to retire. People today spend more time planning a vacation than they do taking responsibility for planning their retirement. The employees were charged with making prudent investment decisions, and West Virginia was charged with ensuring that there was proper oversight to the plan and that proper education was provided to their employees. At the end of the day, West Virginia was asleep at the wheel and should be embarrassed.

Ernest Jordan

Wellington, Fla.

Not to be outdone, Matthew Mehdi Rafat delivers our acerbic, sarcasm-laced punchline for the day from Cambell, California:

We are entrusting our children to people who can't handle basic investing and, somehow, we wonder why we end up with financially illiterate adults.

Matthew Mehdi Rafat

Campbell, Calif