AIG Warned of 'Crisis' if Government Didn't Help

The company warns, in its presentation, that the effects of a failure would spread far beyond its core insurance business. It says the value of the U.S. dollar would suffer on international markets; that bond markets would be placed under additional stress; that money-market funds might be forced to reduce their returns to investors; and that Boeing, the nation's largest maker of airliners, might be forced to make new layoffs if AIG's plane-leasing operation closed down

Harvard economist Kenneth Rogoff told ABC News that the federal government will have to "continue propping up AIG until they've got a plan for the financial sector because for a lot of the big financial institutions, if AIG goes under they're going to lose a lot of money."

"They have trades with AIG where they're just going to lose their shirt and then the financial institutions are going to come to Washington," Rogoff said. "We need a complete plan."

Not everyone was convinced.

"Whenever you hear the phrase 'systemic risk,' it's shorthand for 'we're really in trouble and need money,'" said Barry Ritholtz, director for Equity Research for Fusion IQ and author of "Bailout Nation." "I'm very skeptical of what's called systemic risk."

Ritholtz acknowledged that it's extremely difficult to determine what "potentially" could happen, but said it "certainly smells like scare tactics."

"If it just takes scare tactics to squeeze a billion dollars out of you, they'll use scare tactics," he said.

The report, sources say, was submitted to federal regulators. A source who asked not to be identified said he believed Treasury Secretary Timothy Geithner saw the report before the AIG bailout, but the Treasury Department could not confirm that.

Geithner said he was concerned about ripple effects from an AIG failure when he testified to Congress on March 4.

"Millions of Americans here and around the world depend on AIG for insurance policies and a range of different types of savings products," he continued. "So the judgment your government made in that context was, and I think it was the right judgment, that the effect on confidence would have been very dramatic, I think more dramatic than even in the case with the failure of a major investment bank."

"It would be much better for us and for you if we had another alternative to this path that would contain the damage to the economy as a whole, but that alternative does not exist," Geithner concluded.

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