New York Allows AIG To Lend Itself Money

15 09 2008

The Federal Reserve has asked two investment banks, JPMorgan Chase and Goldman Sachs, to put together $70 billion in loans to help prop up the American International Group, the giant insurance company, a person briefed on the matter said Monday.

More specific details of the plan could not be learned, but it appears that the Fed was seeking to create a bank-financed credit line for A.I.G. as it sought to avoid a credit rating downgrade that could help trigger its demise.

With the big insurance group, regulators and potential lenders racing time on Monday, Gov. David A. Paterson of New York also announced that the state would allow A.I.G. to borrow $20 billion from its subsidiaries, to help bolster its capital in the face of potentially disastrous credit downgrades.

Mr. Paterson said he had authorized the state insurance superintendent, Eric Dinallo, to include the $20 billion asset transfer in a broader plan being worked out at the New York Fed on Monday.

A.I.G. had sought a $40 billion bridge loan from the Fed after other efforts to raise capital crumbled. The rising amount of money needed showed how quickly A.I.G.’s fortunes were deteriorating. Just two months ago, the company was telling investors it believed it had adequate capital.

Normally state insurance regulations would prevent a holding company like A.I.G. from pulling assets out of its subsidiaries, which are insurers that need sufficient liquid resources to pay their claims.

Shares in A.I.G. tumbled more than 60 percent on Monday as investors grew concerned that the firm lacked capital to withstand cuts to its debt rating, which appeared imminent.

Mr. Paterson said the state was committed to helping A.I.G. navigate the rough waters and he declared A.I.G. “financially sound,” but unable to tap sources of liquidity under its own corporate umbrella because of regulatory constraints.

“They needed immediate access to capital,” the governor said. A.I.G. had approached the state for help, Mr. Paterson said, and government officials worked closely with the firm throughout the weekend.

Mr. Paterson said that New York taxpayers would not be put at risk by what the state was doing.

It is the state Insurance Department’s job to make sure A.I.G.’s many insurance subsidiaries remain solvent and are able to pay their claims. Mr. Paterson said he believed it was possible for them to lend their corporate parent money without putting their policyholders at risk because A.I.G. would give them collateral for the loans. He said the collateral would consist of “illiquid assets” but did not describe them.

Insurance sources said the illiquid assets could be the shares of A.I.G.’s wholly owned subsidiaries, such as its aircraft leasing unit. Those shares do not trade.

Mr. Paterson said the lending arrangement between A.I.G. and its subsidiaries would stay in place long enough “to tide them over until they can solve the problem that they have.”

“I hope you’re aware of the risks if we don’t act,” he added. “It is a systemic problem.”

Ratings agencies had threatened to downgrade the insurance giant’s credit rating by Monday morning, a step that would allow counterparties to swap contracts issued by A.I.G.’s financial products unit to withdraw up to $13.3 billion in capital, under their contracts with the company. One person close to the firm said that if such an event occurred, A.I.G. might survive for only 48 hours to 72 hours.

A.I.G. has already raised $20 billion this year. But even that amount of capital has not averted a crisis.

The firm’s fast-growing need for capital was a prominent topic in weekend talks among Wall Street chieftains who gathered at the Federal Reserve Bank of New York to discuss the potential collapse of the investment bank Lehman Brothers. A.I.G. 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 last year and a half.


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2 responses

15 09 2008
Aaron

Now it looks as if even all of this might not be enough for AIG!

15 09 2008
L.

Concise info on $$$ issues that affects all…

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