The American International Group is seeking a $40 billion bridge loan from the Federal Reserve, as it faces a potential downgrade from credit ratings agencies that could spell its doom, a person briefed on the matter said Sunday night.
Ratings agencies threatened to downgrade the insurance giant’s credit rating by Monday morning, allowing counterparties to withdrew capital from their contracts with the company. One person close to the firm said that if such an event occurred, A.I.G. may survive for only 48 hours to 72 hours.
A.I.G.’s sickly financial health emerged late into one of the most tumultuous days in Wall Street history. Lehman Brothers, the 158-year-old investment bank, is expected to file for bankruptcy protection Sunday night, while Bank of America has agreed to buy Merrill Lynch for $50.03 billion.
Though this past weekend was convened to focus on Lehman, the Wall Street chieftains who gathered at the Federal Reserve Bank of New York also pondered a solution for A.I.G. The firm had become one of the biggest underwriters of complex debt securities known credit default swaps, used as insurance for a wide range of products, including the mortgage instruments that have been the bane of Wall Street for the past year and a half.
Eric Dinallo, the New York state insurance superintendent, has been deeply involved in discussions about A.I.G.’s survival, this person said.
The firm had planned to move $20 billion from its regulated insurance business to its holding company and to sell assets and a stake in the company to private equity firms. But A.I.G. has ruled out the capital shift because of the time and complexity involved.
J. C. Flowers & Company, a buyout firm focused on financial services firms, offered $8 billion for a stake in the business that would have given it an option to buy all of A.I.G. down the road.
Kohlberg Kravis Roberts and TPG also said they would bid, but withdrew at the last minute, citing anxiousness over the company’s precarious financial health.
A.I.G.’s extraordinary move of reaching out to the Fed for help may spur other non-investment banks to try a similar move. Companies ranging from General Electric to GMAC have been hurting badly and would desperately love the liquidity that the Fed would provide.
Yet it isn’t clear whether the Fed would acquiesce to A.I.G.’s request.
The firm had earlier been reported to be interested in selling its aircraft leasing business. But people briefed on the matter said that unit bore special tax advantages that A.I.G. had decided would be lost on any other owner.