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The Fed is currently reconsidering helping AIG, and AIG may get a loan package from the Federal Reserve.AIG Plunges as Downgrades Threaten Quest for Capital
By Hugh Son
Sept. 16 (Bloomberg) -- American International Group Inc.
fell 34 percent in New York trading after the insurer's credit
ratings were cut, threatening efforts to raise funds to keep the
company afloat and roiling global financial markets.
S&P lowered AIG's long-term counterparty rating three grades
to A- because of losses tied to home loans and concerns whether
the insurer can raise enough money to meet obligations to
investors who purchased credit-default swaps from the company.
The downgrade of AIG is the latest tremor to shake the
global financial industry, less than a day after Lehman Brothers
Holdings Inc. filed for Chapter 11 bankruptcy protection and
Merrill Lynch & Co. sold itself to Bank of America Corp. for
about $50 billion. Stock markets from Tokyo to London tumbled as
investors weighed the impact of a potential collapse of the
largest U.S. insurer by assets.
``There's a systemic risk if AIG isn't saved,'' Benoit de
Broissia, an equity analyst at Richelieu Finance in Paris, said
in a Bloomberg Television interview. Richelieu has about $6.2
billion under management.
Investors led by former Chief Executive Officer Maurice
``Hank'' Greenberg are considering taking control of the insurer
through a proxy fight or buyout, they said today in a regulatory
filing. The group is reviewing options ``in light of current
circumstances'' at the insurer, the filing said.
Collateral Damage
AIG may be overwhelmed by protection it sold investors on
$441 billion of fixed-income investments, including $57.8 billion
in securities tied to subprime mortgages. The swaps already
forced $25 billion in writedowns over nine months.
The rating cuts may trigger more than $13 billion in
collateral calls from debt investors who bought swaps, according
to an Aug. 6 filing from New York-based AIG, intensifying
pressure on CEO Robert Willumstad to raise cash.
The swaps provided profits when the housing market prospered
``for what has now turned out to be a much greater amount of risk
than anybody anticipated,'' Willumstad, 63, said during an Aug. 7
conference call.
AIG fell $1.62 to $3.14 at 1:23 p.m. in New York Stock
Exchange composite trading, paring losses from earlier in the day
when the shares declined 74 percent. AIG's market value has
shrunk more than 90 percent since peaking at almost $190 billion
at the end of 2006, when it ranked among the world's five biggest
financial companies.
`Much Bigger Problem'
Wall Street's largest firms were to meet at the New York
Federal Reserve for a fifth day today, discussing AIG, said a
spokesman for the New York Fed.
``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, in a CNBC interview. An AIG
collapse would ``be a much bigger problem than most that we've
looked at,'' he said.
S&P also lowered AIG's short-term counterparty credit rating
by two grades to A-2 from the top A-1+ rating, and cut its
counterparty credit and financial strength ratings on most of
AIG's insurance operating subsidiaries by three grades to A+ from
AA+. The ratings remain on watch for a possible further
downgrade, S&P said.
Moody's cut AIG's senior unsecured debt two grades to A2.
Fitch Ratings lowered its assessment to A from AA-.
`Continuing Deterioration'
Moody's said in a statement that its decision was made ``in
light of the continuing deterioration in the U.S. housing market
and the consequent impact on the group's liquidity and capital
position due to its related investment and derivative
exposures.'' Moody's placed AIG's long-term and Prime-1 short-
term ratings on review for possible downgrades.
AIG piled up net losses totaling $18.5 billion in the past
three quarters on writedowns tied to the collapse of the U.S.
subprime mortgage market. The insurer has units that originate,
guarantee and invest in home loans.
``AIG poses a systemic risk because it's a large
counterparty in the financial system,'' said Prasad Patkar, who
helps manage the equivalent of $1.8 billion at Platypus Asset
Management in Sydney. ``It's too big to be allowed to fail.''
In the Aug. 6 filing, AIG outlined the implications of
credit rating downgrades. A cut in its long-term senior debt
ratings to A1 by Moody's and A+ by S&P would permit
counterparties to make additional calls for as much as $13.3
billion of collateral, while a downgrade to A2 by Moody's, and to
A by S&P would permit counterparties to call for approximately
$1.2 billion of additional collateral, the company said in the
filing.
`Immediate Need'
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 had said.
The round of credit-rating cuts ``further accentuates the
immediate need for AIG to secure short-term funding and quickly
execute sales of several of its subsidiaries,'' said Morgan
Stanley analyst Nigel Dally in a note to investors today.
``Whether this is possible in a short time frame remains
questionable.''
The Fed yesterday urged AIG to seek private capital,
according to two people with knowledge of the discussions.
Goldman Sachs Group Inc. and JPMorgan Chase & Co. were 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.
Bridge Loan
The loan would involve temporary financing, a so-called
bridge loan, through a syndicate of banks, and there's no
assurance a deal will be worked out, one of the people said.
The insurer has issued no official statements on its
capital-raising plans this week, frustrating investors.
``We expected the company to make a statement yesterday and
they didn't,'' said Cliff Gallant, an insurance analyst at KBW
Inc., in an interview with Bloomberg Television. ``They are
waiting to have something concrete to say.'' Willumstad had
previously said he'd present a turnaround plan Sept. 25.
AIG spokesman Nicholas Ashooh had no comment today on the
credit downgrades.
``We're still working on a number of alternatives,'' Ashooh
said yesterday. 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 yesterday. The insurer has one day to raise
$75 billion to $80 billion, Paterson told CNBC today. The insurer
may file bankruptcy tomorrow, the network said, citing unnamed
people close to the company.
State Regulation
When an insurance company stumbles or fails, its operations
including obligations to policyholders are handled by state
regulators. The holding company that owes money to stockholders
and lenders may go through bankruptcy court procedures. That
was the route followed by the units of Conseco Inc. after it
filed for bankruptcy in 2002.
AIG hadn't gotten access to the New York lifeline as of
about 10:30 a.m., said David Neustadt, a spokesman for state
Insurance Superintendent Eric Dinallo.
``It would be part of a broader deal,'' Neustadt said. ``If
there's no broader deal, then it doesn't happen.'' The regulators
didn't say yesterday that access to the cash would require such
conditions.
``We have seen some of the companies that serve as the
bedrock of our financial system unraveling before our eyes,''
Paterson said in a news conference yesterday.
Hedge Funds
The $1 trillion-asset company has about $48.7 billion in
hard-to-value holdings, and had 116,000 employees as of Dec. 31,
compared with 97,000 two years earlier. In addition to selling
life insurance and protecting property, AIG owns or manages about
$25.7 billion of real estate including residential, industrial
and retail properties. The company had private equity and hedge
fund holdings of about $30 billion as of June 30.
AIG's $2.5 billion of 5.85 percent notes due in 2018 plunged
14.5 cents to 38 cents on the dollar as of 1:22 p.m. in New
York, according to Trace, the bond-price reporting system of
the Financial Industry Regulatory Authority.
The debt yields 21.5 percent, or about 18 percentage points
more than similar-maturity Treasuries, Trace data show.
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.
`The Bigger Problem'
``The bigger problem here is that AIG is a bigger balance
sheet, the tentacles go further and we don't have the same
relationship between the Fed and an insurance company as we do
with some of the others,'' said Liz Ann Sonders, chief investment
strategist at Charles Schwab & Co. in a Bloomberg Television
interview.
AIG may report writedowns of $30 billion for the period
ending Sept. 30, resulting in its ``worst quarter yet,'' if
Lehman's bankruptcy leads to distressed sales of mortgage assets,
Citigroup Inc. analyst Joshua Shanker said yesterday in a note.
He downgraded AIG to ``hold'' from ``buy.''
The company may consider selling assets, 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 yesterday's share price.
Aircraft Leasing
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. The unit was downgraded today by S&P,
which may increase its cost of borrowing.
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, citing people familiar with the situation it didn't
identify.
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. ``We're obviously dependant on the condition of the
U.S. housing market.''
Last week, the U.S. Treasury seized Fannie Mae and Freddie
Mac, the biggest sources of funding for U.S. mortgages, and
nearly wiped out 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.
`Moral Hazard'
Republican presidential nominee John McCain told CNBC today
that there is a ``moral hazard'' in forcing taxpayers to be
responsible for the poor performance of companies.
Asked whether regulators should allow AIG to fail, McCain
said, ``I think you have to.''
AIG former CEO and Chairman Maurice ``Hank'' Greenberg, who
controls the largest stake in the insurer, has ``repeatedly
offered'' to assist the firm, his spokesman Glen Rochkind said.
Greenberg, 83, saw his holdings decline by $3.1 billion last
week. He controls 11 percent of AIG shares through two investment
firms and personal holdings.
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