A.I.G. Sues U.S. for Return of $306 Million in Tax Payments

Katie Orlinsky for The New York Times

Demonstrators marched in New York’s financial district Thursday to protest corporate excesses.

By LYNNLEY BROWNING

While the American International Group comes under fire from Congress over executive bonuses, it is quietly fighting the federal government for the return of $306 million in tax payments, some related to deals that were conducted through offshore tax havens.

A.I.G. sued the government last month in a bid to force it to return the payments, which stemmed in large part from its use of aggressive tax deals, some involving entities controlled by the company’s financial products unit in the Cayman Islands, Ireland, the Dutch Antilles and other offshore havens.

A.I.G. is effectively suing its majority owner, the government, which has an 80 percent stake and has poured nearly $200 billion into the insurer in a bid to avert its collapse and avoid troubling the global financial markets. The company is in effect asking for even more money, in the form of tax refunds. The suit also suggests that A.I.G. is spending taxpayer money to pursue its case, something it is legally entitled to do. Its initial claim was denied by the Internal Revenue Service last year.

The lawsuit, filed on Feb. 27 in Federal District Court in Manhattan, details, among other things, certain tax-related dealings of the financial products unit, the once high-flying division that has been singled out for its role in A.I.G.’s financial crisis last fall. Other deals involved A.I.G. offshore entities whose function centers on executive compensation and include C. V. Starr & Company, a closely held concern controlled by Maurice R. Greenberg, A.I.G.’s former chairman, and the Starr International Company, a privately held enterprise incorporated in Panama, and commonly known as SICO.

The lawsuit contends in part that the federal government owes A.I.G. nearly $62 million in foreign tax credits related to eight foreign entities, with names like Lumagrove, Laperouse and Foppingadreef, that were set up or controlled by financial products, often through a unit known as Pinestead Holdings.

United States tax law allows American companies to claim a credit for any taxes paid to a foreign government. But the I.R.S. denied A.I.G.’s refund claims in 2008, saying that it had improperly calculated the credits. The I.R.S. has identified so-called foreign tax-credit generators as an area of abuse that it is increasingly monitoring.

The remainder of A.I.G.’s claim, for $244 million, concerns net operating loss carry-backs, capital loss carry-backs, a general refund claim and claims for refunds of other tax-related payments that A.I.G. says it made to the I.R.S. but are now owed back. The claim also covers $119 million in penalties and interest that A.I.G. says it is due back from the government.

In part, A.I.G. says it overpaid its federal income taxes after a 2004 accounting scandal that caused it to restate its financial records. A.I.G. says in part that it is entitled to a refund of $33 million that SICO paid in 1997 as compensation to employees, which it now says should be characterized as a deductible expense.

A.I.G.’s lawyers in the case, at Sutherland Asbill & Brennan, referred calls to the company. Asked about the lawsuit, Mark Herr, an A.I.G. spokesman, said Thursday that “A.I.G. is taking this action to ensure that it is not required to pay more than its fair share of taxes.”

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Can we bail out of the bailouts?

Women walk in front of the AIG building in Tokyo, Japan.

NEW YORK - What if the U.S. government got out of the bailout business?

The idea certainly seemed all right with throngs of Americans who were outraged by news that American International Group paid out millions of dollars in executive bonuses after it was rescued with taxpayer cash.

But would no bailout be even worse? Financial analysts and federal officials have warned that doing nothing to save AIG — or banks or the auto industry — would be a catastrophe, an economic domino effect of bank losses, stock market chaos and job cuts. No one — at least no one in the government — has the stomach for that.

Here's what might happen if companies deemed "too big to fail" were allowed to do just that.

AMERICAN INTERNATIONAL GROUP

For bailout backlash, it's hard to beat AIG. The government has made four separate loans and cash infusions to the crippled insurer, including $30 billion earlier this month. Total tab: $170 billion.

Public outrage reached new heights when word spread that AIG had paid executives $165 million in bonuses. President Barack Obama ordered his treasury secretary to grab back what he could, and one senator even suggested the recipients kill themselves.

So why not pull the plug? Because AIG has 74 million customers and operates in 130 countries, and letting it implode would positively unhinge financial markets around the world.

AIG built a murky, unregulated business issuing insurance for mortgage-backed securities and other debt held by banks. When the housing bubble popped and those securities went bad, AIG was left on the hook for billions of dollars in claims it couldn't pay.

Letting AIG die would make all of that insurance worthless. Banks around the world would be forced to take massive losses. Some could collapse, unnerving markets, driving up unemployment and maybe turning the recession into a depression.

The U.S. got a taste of that scenario in September, when bad debt forced investment bank Lehman Brothers into the biggest bankruptcy in U.S. history. Thousands of other firms were exposed to Lehman's complex financial contracts, and the resulting fear and uncertainty sent stocks plunging.

And that was just a small taste.

"AIG is about five times bigger than Lehman Brothers, and we learned that Lehman Brothers should not have gone bankrupt," said Mark T. Williams, professor of finance and economics at Boston University and a former Federal Reserve bank examiner.

It's not just AIG's life at stake. Over the weekend, the company named the trading partners who indirectly benefited from the taxpayer rescue. Those partners included Goldman Sachs ($12.9 billion) and Merrill Lynch ($6.8 billion).

So by bailing out AIG, the government is essentially bailing out those and other financial institutions whose fate depends on AIG's survival, said Sung Won Sohn, an economics professor at California State University, Channel Islands.

"If the money dries up, we'd see a lot more bad banks," Sohn said.

AIG itself has predicted nothing short of a financial apocalypse unless it stays on government life support.

In a bleak report to the Treasury Department late last month, AIG said its collapse could batter credit markets, bankrupt the U.S. insurance industry, depress the dollar, increase U.S. borrowing costs and shatter consumer and business confidence everywhere.

"The failure of AIG," the company warns in the report, "would cause turmoil in the U.S. economy and global markets, and have multiple and potentially catastrophic unforeseen consequences."

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

Not everyone buys the doomsday scenario. Some critics, including billionaire investor Jim Rogers, say keeping the company on the public dole is ruining the U.S. economy.

And Phil Kerpen, director of policy for Americans for Prosperity, an antitax lobbying group, said the government "should stop throwing good money after bad" and allow AIG to go into bankruptcy.

"There might be some contagion. There might not be. But we know for certain that the course we're on now isn't working," he said.

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The government says letting AIG fail simply is not an option.

Federal Reserve Chairman Ben Bernanke, speaking to legislators earlier this month, warned that the damage to the world economy of an AIG failure would run into the "multiples of trillions."

That doesn't mean the government hasn't at least considered a world without AIG. On its Web site, the Treasury Department tracks what it calls "Systematically Significant Failing Institutions." There's a single company on the list: AIG.

So far, the government has invested $200 billion total in about 400 banks, and it says it stands ready to spend even more. Two titans of the industry, Citigroup and Bank of America, have received $45 billion apiece.

And the banks may actually be stabilizing. JPMorgan Chase, Citigroup and Bank of America all say they were profitable in January and February. Citigroup stock, which traded below $1, has bounced back to more than $3.

For now, the government has a 36 percent ownership stake in Citigroup. If the government pulled its cash and investors lost confidence and drove the bank into bankruptcy, financial markets would be devastated.

The Federal Deposit Insurance Corp. points out that no American has ever lost a penny in a failed bank. But the FDIC has also never handled a failure as big as a Citigroup or a Bank of America.

Bert Ely, an independent banking analyst in Alexandria, Va., said pulling the plug on the banks could have a destructive impact on markets similar to the convulsions unleashed by Lehman Brothers' collapse.

Letting Citigroup and Bank of America go down in the same way would be "like taking a house that had some damage and burning it down," Ely said. "It's economic arson."

The concern, not unlike with AIG, is that letting a big bank go under would leave its trading partners saddled with huge losses, shattering confidence and leading investors to pull out the money they have left in the market.

But others say keeping the bailout money flowing is only making things worse.

Bill Seidman, a former chairman of the FDIC who ran the government bailout during the savings and loan crisis, said he does not believe letting failing banks die would trigger a brutal domino effect.

He's calling for a temporary nationalization that would end bailouts for insolvent banks, clean up their balance sheets and sell them back into the private sector.

"I don't think we would bring down the system by doing that," he said.

The White House isn't taking that chance. Obama's 2010 budget proposal sets aside up to $750 billion more in bailout money if banks fall deeper into the abyss. That's on top of the $700 billion bank bailout launched by the Bush administration.

In the meantime, the administration is urging patience.

"It is surely tempting to say the hell with them all," White House economic adviser Lawrence Summers said in a speech last month. But he added, "You can't responsibly govern out of anger."

THE AUTOMAKERS

General Motors and Chrysler have received more than $17 billion in government loans and asked to borrow $21.6 billion more. Their financing arms have received $6.5 billion on top of that.

The auto industry contends the failure of either of the two would set off a chain reaction that could ultimately cost 3 million jobs and suck $400 billion out of the economy over three years.

That's because hundreds of companies that supply parts to the Big Three, not to mention dealerships, would also be hurt. In fact, the Center for Automotive Research in Ann Arbor, Mich., heavily funded by the auto industry, contends that just 239,000 lost jobs would come from the automakers themselves.

The industry contends that if just one of the Big Three failed, 1.5 million jobs would disappear in a year. Ilhan Geckil, senior economist for the Anderson Economic Group, which also studied the impact of losing an automaker, said Michigan's unemployment rate would probably rise from the current 11.6 percent to as high as 14 percent.

The good news: The job pain would be eased somewhat because both the surviving Detroit automakers and foreign automakers who have plants in the United States would start to pick up the slack.

And some doubt the job losses would be so dire to begin with.

Susan Helper, a professor of economics at Case Western Reserve University in Cleveland who has studied the auto industry, says the chain reaction would be smaller — although suppliers of parts for certain car models might be out of luck.

"I think the auto supply base is fairly intertwined," she said in an e-mail. "I think it's unlikely that every single supplier would be forced to stop production."

Copyright 2009 The Associated Press.

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World economy 'to shrink in 2009'

By Steve Schifferes Economics reporter, BBC News The world economy is set to shrink by between 0.5% and 1.0% in 2009, the first global contraction in 60 years. In its gloomiest forecast yet, the International Monetary Fund (IMF) says that developed countries will suffer a "deep recession". The global economic body says "the prolonged financial crisis has battered global economic activity beyond what was previously anticipated". Just two months ago, the IMF predicted world output would increase by 0.5%. In the event of further delays in implementing comprehensive policies to stabilise financial conditions, the recession will be deeper and more prolonged IMF EU to debate extra stimulus calls What is a global recession? But in its report drawn up for the G20 group of finance ministers, the IMF now says that the whole world economy will shrink, and predicts that the advanced economies will suffer a decline in output of between 3% and 3.5% in 2009, and barely grow in 2010, with growth of between 0% and 0.5%. The IMF says this will happen despite a big fiscal stimulus from many G20 countries designed to boost growth. It says that the G20 as a whole is adding 1.8% of GDP ($780bn) to boost growth this year - but that the EU is lagging behind with only 1%. And it warns that the UK is building up the biggest fiscal deficit amongst all the G20 countries, which will amount to 11% of GDP by 2010. Financial crisis unresolved The IMF warns that the economic conditions could still deteriorate further if the banking crisis was not tackled head on by governments around the world. "In the event of further delays in implementing comprehensive policies to stabilise financial conditions, the recession will be deeper and more prolonged," the report says. The global slowdown has affected exporters such as Bangladesh The IMF says its revised projections reflect "unrelenting financial turmoil, negative incoming data, sinking confidence, and the limited effect to date of policy responses with respect to the restoration of financial system health." Japan is forecast to decline the most, by 5.8% this year, while the eurozone will contract by 3.2% and the US by 2.6%. The most urgent problem in restoring the banking system to health is in the United States, where the Obama administration has yet to reveal details of its plan for private-public partnership to buy up to $1tn in toxic assets. At the G20 finance ministers meeting at the weekend, restoring lending by tackling problems in the financial system was cited as the "key priority" - a message reinforced by G20 business leaders who met in London on Wednesday. Warning on Eastern Europe Meanwhile, the IMF was also warns of a serious risk that emerging economies will be unable to secure external finance, as banks and investors in rich countries withdraw their money. "The risks are largest for emerging countries that rely on cross-border flows to finance current account deficits," it says. And this makes central and eastern European countries likely to be the "most adversely affected" - with the Baltic states, Hungary, Romania and Bulgaria "suffering the greatest damage". The IMF is already in negotiations about a rescue package for Romania. East Asian countries, which rely heavily on manufacturing exports, have also been hard-hit by the decline of world trade, particularly in the IT sector. In relative terms, the developing and emerging market countries as a whole, which are predicted to grow by just 1.5% to 2.5%, below the growth of population in many countries, have suffered the biggest downward revisions. Fiscal stimulus In addition to fixing the banking sector, many countries are now spending more public money to boost economic growth. The IMF estimates that the G20 countries as a whole will spend an extra 1.8% of GDP ($780bn) in 2009 on fiscal stimulus, not far from its earlier recommendation that they spend at least 2% of GDP on boosting growth. Taking into account the "automatic stabilisers", for example the increased spending on unemployment benefits that results from a slowdown, it says that in 2009 there will be a 2.4% boost to GDP from fiscal expansion. It says the fiscal expansion could add around 2% to world growth in 2009 and create approximately 7 million new jobs (or 19 million if China and India are included). But the IMF warns that there is much less spending planned for 2010, with extra government spending of only $580bn (1.2% of GDP) across the G20, and a total fiscal boost of only 0.4%. This has caused much dissent among G20 members, with the US, whose huge fiscal stimulus plan runs well into 2010, urging other G20 countries to boost their spending further. Original here