Tuesday, September 16, 2008

AIG's Death Throes

American International Group Inc., the biggest U.S. insurer by assets, may be propped up by $70 billion to $75 billion in loans arranged by Goldman Sachs Group Inc. and JPMorgan Chase & Co., according to people familiar with the situation.

The Federal Reserve urged AIG to seek private capital and discouraged the insurer from expecting a loan from the central bank, according to two people with knowledge of the discussions. Goldman and JPMorgan are working with AIG to determine how much the New York-based insurer needs, said two more people, all of whom declined to be identified because negotiations are private.

Wall Street's biggest firms are working together to avoid a failure at AIG, which sold the banks and other investors protection on $441 billion of fixed-income assets, including $57.8 billion in securities tied to subprime mortgages. The companies convened at the New York Fed for a fourth consecutive day, this time to discuss AIG, which plunged 61 percent today in New York trading.

"I don't know of a major bank that doesn't have some significant exposure to AIG,'' said Kenneth Lewis, chief executive officer of Bank of America Corp., in a CNBC interview. An AIG collapse would ``be a much bigger problem than most that we've looked at.''

AIG fell $7.38 to $4.76 at 4:15 p.m. in New York Stock Exchange composite trading. The company has declined 92 percent this year in New York trading, making it the worst performer in the Dow Jones Industrial Average.

The loan would involve temporary financing, a so-called bridge loan, through a syndicate of banks, and there's no assurance an agreement will be worked out, one of the people said.

$20 Billion Lifeline

"We're still working on a number of alternatives,'' said Nicholas Ashooh, spokesman for AIG. JPMorgan's Brian Marchiony and Goldman's Lucas van Praag declined to comment.

AIG was given special permission to access $20 billion of capital in its subsidiaries to free liquidity, New York Governor David Paterson said today. The move gives the insurer time to work on securing more capital, he said.

The insurer "needs immediate access to capital'' and will be able to swap illiquid assets to free up holdings at its subsidiaries, Paterson said. Each time AIG uses assets as collateral for cash loans, the insurance department will examine the transaction to protect policyholders.

"We have seen some of the companies that serve as the bedrock of our financial system unraveling before our eyes,'' Paterson said.

Credit Rating Cuts

AIG Chief Executive Officer Robert Willumstad has tried to raise cash to forestall debt-rating downgrades that could hobble the insurer. A ratings cut may have "a material adverse effect on AIG's liquidity'' and trigger more than $13 billion in collateral calls from debt investors who bought the swaps, the insurer said in an Aug. 6 filing. Fitch Ratings and A.M. Best Co. today cut the company's ratings, citing the difficulty in raising capital.

AIG has already posted $16.5 billion in collateral through July 31. A downgrade could also set off early termination of swaps with $4.6 billion in payments, AIG said.

The Fed has hired Morgan Stanley to examine alternatives for AIG, a person familiar with the situation said. Morgan Stanley will review what role, if any, the government should play in helping the insurer, said the person, who declined to be identified because the talks are confidential.

AIG may report writedowns of $30 billion resulting in its "worst quarter yet'' for the period ending Sept. 30 if Lehman's bankruptcy leads to distressed sales of mortgage assets, providing lower market values for AIG's holdings, Citigroup Inc. analyst Joshua Shanker said today in a note. He downgraded AIG to "hold'' from "buy.''

Disposals Expected

The company may consider selling units including American General Finance, AIG's consumer lender, which could fetch more than $6 billion if the unit sold for twice its book value. AIG Investments could sell for more than $3 billion if it sold for 2.5 percent of clients' assets under management. The company's stake in reinsurer Transatlantic Holdings Inc. is worth about $2.25 billion, based on today's share price.

Bank of America analyst Alain Karaoglan said Willumstad, 63, should reconsider the decision to keep its aircraft-leasing unit, International Lease Finance Corp., which could sell for $7 billion to $14 billion.

AIG rejected investments from buyout firms KKR & Co., TPG Inc. and J.C. Flowers & Co., people familiar with the talks said. Billionaire Warren Buffett's Berkshire Hathaway Inc., is no longer talking with AIG about an investment in the insurer, CNBC reported today, citing unnamed people familiar with the situation.

$20 Billion Lifeline

The insurer raised $20.3 billion in May by selling debt and equity, diluting the holdings of long-time investors. It's "very hard to predict'' if AIG will need more capital, Willumstad said on Aug. 7.

Last week, the U.S. Treasury seized Fannie Mae and Freddie Mac, the two biggest sources of funding for U.S. mortgages, wiping out most of the value of their shares. AIG had $550 million to $600 million of preferred shares in the companies, said a person who declined to be identified because the insurer hadn't made a formal announcement.

Hurricane Ike, which struck Texas Sept. 13, may also pressure AIG, costing insurers $6 billion to $18 billion, the most since the record storm season of 2005, according to firms that specialize in gauging the effects of disasters.

AIG's former CEO and Chairman Maurice "Hank'' Greenberg, who controls the largest stake in the insurer, wasn't involved in the company's planning Sept. 13 and yesterday and has "repeatedly offered'' to assist the firm, his spokesman Glen Rochkind said yesterday.

Greenberg, 83, saw the holdings decline by $3.1 billion last week. He controls 11 percent of AIG shares through two investment firms and personal holdings.

Source - Bloomberg


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