US insurance giant AIG raced against the clock to avert collapse Tuesday after three blows to its credit standing, and central banks pumped out 160 billion dollars to prop up financial markets.
AIG was at risk of following Lehman Brothers into bankruptcy despite approval for it to borrow 20 billion dollars and as report said the Federal Reserve had asked two banks to help provide 70-75 billion dollars.
Markets, investors and savers around the world focused on AIG to see if it would be the next failure in the firestorm from the shocks on Wall Street on Monday, when another investment bank Merrill Lynch was bought out of trouble by Bank of America.
Economist Jeffrey Sachs of Columbia University warned: "There is more ahead. The US economy is definitely going into recession … There’s more financial turmoil ahead."
Stock markets fell for a second day on widespread recognition that the financial crisis is the worst since the crash of 1929. The fall in Europe was smaller than on Monday but Asia markets plunged and bank shares everywhere were showing big losses.
AIG was in the eye of the storm as the European Central Bank, and British and Japanese central banks injected 160 billion dollars so that banks, reluctant to lend to each other, have funds.
The US Treasury, as it had done for Lehman, ruled out using taxpayer money to prop up AIG.
The Wall Street Journal, citing people familiar with the situation, reported that on Monday the US Federal Reserve asked Goldman Sachs Group and JP Morgan Chase to help make 70-75 billion dollars in loans available to AIG.
New York state has thrown the only lifeline of sorts to AIG, announcing Monday that the company can, in effect, loan itself 20 billion dollars, by borrowing against its assets.
But even that failed to reassure credit rating agencies. In blow after blow late Monday, the three main agencies — Standard & Poor’s, Moody’s and Fitch — lowered AIG’s credit score.
Bottom line: they judge the solvency of AIG, the largest US insurer, with a global reach, at risk.
As a consequence, AIG will need to raise huge amounts in new capital to survive, although it already has sought billions of dollars to keep it going.
The Wall Street Journal reported Tuesday that people close to the situation say AIG may be forced into filing for bankruptcy if it cannot raise the money by Wednesday.
"The situation is dire," an anonymous source close to AIG told the Journal.
The three ratings agencies gave essentially the same reasons for the downgrade: the US housing crisis, to which AIG is highly exposed, and its share freefall.
On Monday AIG shares plummeted 61 percent to 4.76 dollars; they have lost 93 percent of their value in a year.
"The rating actions reflect Fitch’s view that AIG’s financial flexibility and ability to raise holding company cash is extremely limited," Fitch said in a statement.
Standard & Poor’s Ratings Services lowered its long-term counterparty rating to ‘A-’ from ‘AA-’ and its short-term counterparty credit rating on AIG to ‘A-2′ from ‘A-1+’ according to a statement. Moody’s downgraded AIG to ‘A2′ from ‘AA3′ and Fitch lowered its rating to ‘A’ from ‘AA.’
Far more than other insurers, AIG has been a big player in a complex parallel market called credit default swaps (CDS), financial instruments in which Wall Street companies take out a form of market insurance against the risks of bond default.
These products, often linked to the US real-estate market, are at the heart of the current banking crisis and have led to massive write-downs of assets around the world.
AIG alone has written down 25 billion dollars amid spiking defaults on US mortgage payments in the United States.
In a filing with US market regulator, the Securities and Exchange Commission, AIG said it would need 13.3 billion dollars to meet its CDS obligations, if S&P and Moody’s lowered its rating a notch.
Moody’s, in a dire warning, said that "further downgrades of the parent and certain operating units are likely if the immediate liquidity and capital concerns are not fully addressed. Such downgrades could amount to multiple notches."
The stakes are high for a company that until only recently had been long considered the world’s largest insurer. In the past year it has been battered by the global credit crunch and the worst US housing slump in decades.
AIG has 74 million customers worldwide, most of them American, who would find themselves without insurance if the company goes bankrupt. It employed 116,000 people in 130 countries at the end of 2007.
According to US media reports, among the assets AIG is hoping to sell is its aircraft leasing business, International Lease Finance Corporation, which has a fleet of 1,000 planes.
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AP Sources: $85B gov’t bailout of AIG imminent By IEVA M. AUGSTUMS and STEPHEN BERNARD, AP Business Writers
1 minute ago
The government is expected to announce an $85 billion bailout of the huge insurer AIG, people with knowledge of the situation said Tuesday, in a bid to avoid further market upheaval. An announcement from the government about the plan was expected by 9:30 p.m. EDT, the people said.
If AIG had failed, it could have triggered a wave of problems for banks around the world and opened the ugliest chapter yet of the financial meltdown that has slashed billion of dollars from global stock markets.
The people, who asked not to be named because of the sensitive nature of the negotiations, said bankers and federal officials had decided a government bailout of American International Group Inc. was the best solution to save it from collapsing.
The people said the Federal Reserve would receive warrants that could be exchanged for an ownership stake in the company in return for its $85 billion loan. The ownership stake could total close to 80 percent of the New York-based insurance company, one of the world’s largest.
Earlier, Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson met with Sen. Christopher Dodd, D-Conn., Majority Leader Harry Reid, D-Nev., and House Republican leader John Boehner of Ohio, to brief them on the government’s option.
Bernanke and Paulson left the meeting without commenting.
"At the administration’s request, I met this evening with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. They expressed the administration’s views on the deepening economic turmoil and shared with us their latest proposals regarding AIG," Reid told reporters. "The Treasury and the Fed have promised to provide more details in the near future, which I believe must address the broader, underlying structural issues in the financial markets."
On Tuesday, shares of the insurance company swung violently as rumors of potential deals involving the government or private parties emerged and were dashed. By late Tuesday, its shares had closed down 20 percent — and another 45 percent after hours. Still, no deal emerged.
The problems at AIG stemmed from its insurance of mortgage-backed securities and other risky debt against default. If AIG couldn’t make good on its promise to pay back soured debt, investors feared the consequences would pose a greater threat to the U.S. financial system than this week’s collapse of the investment bank Lehman Brothers.
The worries were triggered after Moody’s Investor Service and Standard and Poor’s lowered AIG’s credit ratings, forcing AIG to seek more money for collateral against its insurance contracts. Without that money, AIG would have defaulted on its obligations and the buyers of its insurance — such as banks and other financial companies — would have found themselves without protection against losses on the debt they hold.
"It might not just bring down other financial institutions in the U.S. It could bring down overseas financial institutions," said Timothy Canova, a professor of international economic law at Chapman University School of Law. "If Lehman Brother’s failure could help trigger AIG’s going down, who knows who AIG’s failure could trigger next."
New York-based AIG operates an insurance and financial services businesses ranging from property, casualty, auto and life insurance to annuity and investment services. Those traditional insurance operations are considered healthy and the National Association of Insurance Commissioners said "they are solvent and have the capability to pay claims."
IF they filed for bankruptcy protection (which we now know won’t happen with the gov’t assistance) the life insurance holders should be fine. If anything they’d spin off the profitable insurance unit to a buyer in order to raise cash. AIG doesn’t sell insurance…American General does (as does their other subsidiaries)….keep that in mind. AIG just owns American General.
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