AIG Warned of 'Crisis' if Government Didn't Help Draft obtained by ABC News warned of worldwide crisis if no bailout.

March 9, 2009 -- An AIG report to the Treasury Department last month warned that if the government didn't come to its rescue again, its collapse would trigger a "chain reaction of enormous proportion" that would "potentially bankrupt or bring down the entire system" and make it impossible for AIG to repay the billions it already owed the U.S. government.

Four days later, AIG was given $30 billion in federal aid on top of the $130 billion it had already received.

Read the AIG Report to the Treasury Department here .

A draft of the report, obtained by ABC News, was marked "strictly confidential." It said, "The failure of AIG would cause turmoil in the U.S. economy and global markets and have multiple and potentially catastrophic unforeseen consequences."

The draft was dated Feb. 26. On March 2, the Treasury Department and the Federal Reserve system announced that AIG, which lost $61.7 billion in the fourth quarter of 2008, would receive $30 billion in new government help.

AIG warns in its report of the "systemic risk" that a potential collapse posed. It describes a "systemic risk" as one that "could potentially bankrupt or bring down the entire system or market."

The company said, "What happens to AIG has the potential to trigger a cascading set of further failures, which cannot be stopped except by extraordinary means."

"The inability of AIG to immediately secure additional assistance from the Federal Reserve and the Department of the Treasury threatens not only AIG's sales process, but also consumer and business confidence around the world," it said.

The report referred to the unexpected downward economic spiral after the Fed allowed Lehman Brothers, the giant investment bank, to collapse last fall. AIG said the damage to credit market would "dwarf the Lehman fallout."

The Treasury Department told ABC News it would have no comment on the report, and the White House referred questions to the Treasury Department.

Late today, AIG released a more recent version of the draft, dated March 6. The language in it was substantially the same as in the copy obtained earlier by ABC News.

The company points out in the report that it operates in 140 countries and is the largest insurer in the Mideast, Southeast Asia, Hong Kong, the Philippines, Thailand and Japan. It argues that its failure would create a "crisis of confidence" worldwide.

Fed Feared AIG's Ripple Effect

The struggling insurance behemoth also describes itself as the largest retirement-services provider for the American education and health-care systems in the United States.

AIG warned the Treasury Department that it was even more crucial for it to be rescued in February than it was late last year when the Bush administration came to its aid with tens of billions of dollars.

"Permitting AIG to fail would be even more serious today than in September, especially in view of the support of the U.S. government," the report said. "Public confidence in financial institutions is at a nadir and it is questionable whether the economy could tolerate another shock to the system that a failure of AIG would produce."

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.