AIG Downgraded in Ratings

16 09 2008

The rating on embattled insurance giant American International Group Inc. (AIG.N: Quote, Profile, Research, Stock Buzz) was slashed by at least two notches by the three top global rating agencies, who also warned more downgrades could follow.

The triple strike jolted the insurer even as it is struggling to find funding sources at a time of global financial tumult which has brought two of the biggest Wall Street investment banks to their knees.

Moody’s Investors Service cut AIG’s rating to A2 from Aa3, a two-notch downgrade. Standard & Poor’s Ratings Services lowered the rating to A-minus from AA-minus, a three-peg reduction and Fitch Ratings reduced its standing to A from AA-minus, a two notch cut. AIG’s ratings are still investment grade, although all three agencies said more downgrades could follow.

The announcements were made during Asia time on Tuesday, hours after New York state officials pieced together a $20 billion lifeline which would give the company temporary respite. [ID:nN15279674]

AIG’s troubles, much like those of some of its Wall Street peers, stem from guarantees it wrote on mortgage-linked derivatives that have left it with a total of $18 billion in losses over the past three quarters.

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Fed Loans AIG 85mil

16 09 2008

Fearing a financial crisis worldwide, the Federal Reserve reversed course on Tuesday and agreed to an $85 billion bailout that would give the government control of the troubled insurance giant American International Group.

The decision, only two weeks after the Treasury took over the federally chartered mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history.

With time running out after A.I.G. failed to get a bank loan to avoid bankruptcy, Treasury Secretary Henry M. Paulson Jr. and the Fed chairman Ben S. Bernanke convened a meeting with House and Senate leaders on Capitol Hill about 6:30 p.m. Tuesday to explain the rescue plan.

They emerged just after 7:30 p.m. with Mr. Paulson and Mr. Bernanke looking grim, but with top lawmakers generally expressing support for the plan. But the bailout is likely to prove controversial, because it effectively puts taxpayer money at risk while protecting bad investments made by A.I.G. and other institutions it does business with.

What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy, but A.I.G.’s role as an enormous provider of financial insurance to investors who bought complex debt securities. That effectively required A.I.G. to cover losses suffered by the buyers in the event the securities defaulted. It meant A.I.G. was potentially on the hook for billions of dollars worth of risky securities that were once considered safe.

If A.I.G. had collapsed — and been unable to pay all of its insurance claims — institutional investors around the world would have been instantly forced to reappraise the value of those securities, which in turn would have reduced their own capital and the value of their own debt.

“It would have been a chain reaction,” said Uwe Reinhardt, a professor of economics at Princeton University. “The spillover effects could have been incredible.”

Financial markets, which on Monday had plunged over worries about A.I.G.’s possible collapse, reacted with relief to the news of the bailout. In anticipation of a deal, stocks rose about 1 percent in the United States on Tuesday and were up about 2 percent in early trading in Asian markets Wednesday morning.

Still, the move will likely start an intense political debate during the presidential election campaign over who is to blame for the financial crisis that prompted the rescue.

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said Mr. Paulson and Mr. Bernanke had not requested any new legislative authority for the bailout at Tuesday night’s meeting. “The secretary and the chairman of the Fed, two Bush appointees, came down here and said, ‘We’re from the government, we’re here to help them,’ ” Mr. Frank said. “I mean this is one more affirmation that the lack of regulation has caused serious problems. That the private market screwed itself up and they need the government to come help them unscrew it.”

The decision was a remarkable turnaround by the Bush administration and Mr. Paulson, who had flatly refused over the weekend to risk taxpayer money to prevent the collapse of Lehman Brothers or the distressed sale of Merrill Lynch to Bank of America. Earlier this year, the government bailed out another investment bank, Bear Stearns, by engineering a sale to JPMorgan Chase that left taxpayers on the hook for up to $29 billion of bad investments by Bear Stearns. The government hoped at the time that this unusual step would both calm markets and lead to a recovery by the financial system. But critics warned at the time that it would only encourage others to seek bailouts, and the eventual costs to the government would be staggering.

The decision to rescue A.I.G. came on the same day that the Fed decided to leave its benchmark interest rate unchanged at 2 percent, turning aside hopes by many on Wall Street that the Fed would try to shore up confidence by cutting rates once again.

Fed and Treasury officials initially had turned a cold shoulder to A.I.G., when company executives pleaded on Sunday night for the Fed to provide a $40 billion bridge loan to stave off a crippling downgrade of its credit ratings as a result of tens of billions of dollars of losses related to insurance investments that have turned sour.

But government officials reluctantly backed away from their tough-minded approach after a failed attempt to line up private financing with help from JPMorgan Chase and Goldman Sachs, which told federal officials they simply could not raise the money given both the general turmoil in credit markets and the specific fears of problems with A.I.G.

The complexity of A.I.G. ’s business, and the fact that it does business with thousands of companies around the globe, make its survival critical at a time when there is stress throughout the financial system worldwide.





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.





AIG Seeks Federal Aid

14 09 2008

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.