Muni-GICs

  • Executive Life Insurance Company
  • AIG - AIGFP
  • (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.

Executive Life Insurance Failure, Charles B. Rangel (D-NY)  ---  [BonkNote]