Muni-GICs – Guaranteed Investment Contracts

Muni-GICs

• Executive Life Insurance Company
• AIG – AIGFP

• 2008 0208 – Reuters – FSA, BofA Could Be Sued by SEC Over Muni Contracts – [link]

• (p4) – Mr. Schreiber provided an overview of the Project Metropolis structure, which addresses liquidity demands related to AIGFP’s municipal guaranteed investment agreement portfolio on a downgrade.
  • He explained that the structure effectively gave AIGFP the ability to put its obligations to post collateral under the municipal guaranteed investment agreements to a Berkshire Hathaway subsidiary, and to pay a premium for the service provided in the form of an illiquid asset, life settlement policies.

2008 0905 – AIG Board of Directors Minutes 9/5/2008 – 5p

• (p10) – [Muni-GICS] – John Garamendi, California Insurance Commissioner – Let us take a closer look at the Executive Life Company, its products and its customers.
  • Executive Life sold guaranteed investment contracts to State and local governmental entities.
  • These GICs are similar to certificates of deposit, that is, lending money to the insurance company under a contract which guarantees a rate of return.
    • The contracts were guaranteed only in the sense that a certain unusually high rate of return was promised by Executive Life to the purchasers.
    • That rate of return was always enticingly higher than what the governments themselves were obliged to pay for their municipal bonds.
  • ELIC was able to offer such attractive “guarantees,” because of its own heavy reliance on even higher yielding junk bonds.
  • So the scene was set for some would-be public sector arbitragers.
  • The State and local government organizations would issue low interest bonds, use some or all of the funds thus borrowed to purchase high-interest Executive Life GICs and expect to make an easy profit on the difference, but there was trouble ahead. Ultimately, as of the end of March of this year, $1.9 billion of these kinds of municipal GICs are on the books.

1991 0522 – GOV (House) – Certain Issues Related to the Conservatorship of the Executive Life Insurance Company, (CSPAN) Executive Life Insurance Failure, Charles B. Rangel (D-NY)  —  [BonkNote]