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AIG paid $12.1bn to municipalities in states led by California and Virginia as part of the $180bn bail-out that is being scrutinised by the Obama administration and the American public.

AIG at the weekend detailed the use of the bailout funds to counterparties and, as with many recipients of US rescue funds, the insurer is under fire for how it is managing the aid.

Details of the money paid to local governments and public entities in the US come as AIG has also outlined its use of public funds to pay large US and international banks who were counterparties in derivatives contracts. AIG has been criticised for paying $165m in bonuses while benefiting from federal aid.

Municipalities in various states received $12.1bn between September 16 2008 and December 31 2008 to honour guaranteed investment agreements, AIG said.

These contracts are common in the world of municipal finance. Municipalities use them to earn a “guaranteed” rate of return on proceeds from bond sales that the municipality does not need to use immediately.

AIG did not specify the individual entities that received funds related to these financial agreements, but it broke down the payments by state.

State and local governments have been hard hit in the last year as tight credit and widening budget gaps made borrowing expensive for some large, high-rated issuers and impossible for smaller, riskier entities.

“The state and the municipalities in California, just like their cohorts, throughout the country are under enormous fiscal stress,” said the California state treasurer’s office. “Declining revenues and lay-offs are really hurting state and local governments.

“To the extent that AIG would not have been able to honour its obligations, it just would have been one more straw on the camel’s back,” the treasurer’s office said.

Municipalities typically disclose information on these arrangements, which are more often referred to as guaranteed investment contracts, or GICs, such as counterparty and amount invested.

But the full amount that all municipal issuers have tied up in GICs is largely unknown, said Lynnette Kelly Hotchkiss, the executive director of the Municipal Securities Rulemaking Board, a self-regulatory organisation charged with investor protection for the municipal bond market.

GICs themselves are under scrutiny. The Securities & Exchange Commission, the US Department of Justice and the Internal Revenue Service are looking into the way these contracts are awarded.

AIG counterparties
Collateral paid in relation to credit default swapsPayments under guaranteed investment agreements
Société Générale4.1California1.02
Deutsche Bank2.6Virginia1.01
Goldman Sachs2.5Hawaii0.77
Merrill Lynch1.8Ohio0.49
DZ Bank0.7Massachusetts0.34
Total collateral postings22.4Total GIAs12.10
Source: company
Copyright The Financial Times Limited 2017. All rights reserved.

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