AIG says cities got $12.1 billion of bailout funds

WASHINGTON (Reuters) - American International Group, the insurer that received a taxpayer bailout of up to $180 billion, said on Sunday it used $12.1 billion of those funds to make payments on guaranteed investment contracts held by cities across the country.

California municipalities received the most -- $1.02 billion -- from the contracts, which are structured investments that guarantee a fixed rate of return to municipal bond issuers, AIG documents showed. Cities and other issuers enter into the agreements, knows as GICs, to earn that rate of return on proceeds from their bond issues until they need to spend the money on projects.

Virginia cities received the next largest amount -- $1.01 billion -- and cities in New York state received $210 million, AIG said.

The company disclosed the payments as part of a broader announcement of counterparties that received funds, and it only listed payments made between September 16 and December 31 of last year.

Since 2006 the U.S. government has investigated possible bid-rigging in the awarding of the contracts. Alongside the investigation into more than 30 firms that is being coordinated by the Internal Revenues Service, the U.S. Justice Department and the Securities and Exchange Commission, there is a multi-state probe into insurance companies that issued the contracts, spearheaded by Connecticut.

Many bond issuers, including numerous California cities have filed class-action lawsuits, as well, claiming bidders were allowed a “last look” at others’ bids in order make their pricing more attractive or some bidders were asked to make low, uncompetitive offers in exchange for preferential treatment in later deals.

Last year, AIG said some of its employees had received “Wells notices” from the SEC that they were being investigated for possibly breaking the law in relation to the contracts.

But other figures in the federal bailout, current financial crisis and bond insurer meltdown have been investigated, too, including UBS, Wachovia, and Bank of America, which is cooperating with the federal agencies.

Recently, concerned that these contracts were hurting bond issuers, the Municipal Securities Rulemaking Board, the municipal market’s self regulator, proposed regulating those who sell the contracts with the same standards as bond dealers.

Reporting by Lisa Lambert, writing by Karen Pierog