The high stakes poker game has shifted to another side room. This room has AIG one on one with the Fed begging for assistance.
Here is the background: Battered insurer AIG’s $20bn asset sale.
AIG, the world’s largest insurer, is planning a $20 billion (£11 billion) asset sell-off as it fights to correct a record slump in its share price and braces for the impact of Hurricane Ike.
AIG shares have been pummelled by worries over a possible credit downgrade and the continued chaos on Wall Street. The shares plunged 46% last week. AIG said: “We are working with a number of firms on a variety of options.” It could not comment on whether the firm would be making further announcements tomorrow.
The move comes as AIG and other insurers brace themselves for the cost of Hurricane Ike in the Caribbean. Thousands of homes have been destroyed and 2.9m people left without power by the storm that is ravaging southeast Texas.
AIG’s Turnaround Plan Acelerated
Last Friday Bloomberg reported on AIG’s Accelerated Turnaround Plan.
American International Group Inc., the largest U.S. insurer, may accelerate plans to raise capital or sell assets after the shares plunged 46 percent this week, said a person familiar with the company.
AIG shares slumped and the cost of insuring its debt rose to a record today on concern the company may be the next big financial firm after Lehman Brothers Holdings Inc. to run short of capital. Standard & Poor’s said it may downgrade AIG’s credit ratings because the stock plunge may crimp access to capital.
“It’s a carbon-copy story for a lot of these guys that need capital,” said Robert Bolton, managing director for trading at Mendon Capital Advisors Corp. in Rochester, New York. “It’s unprecedented that two storied franchises, Bear Stearns and Lehman, have taken on the type of water they have, and now there are fears about another titan, AIG.”
“As distressed as they are, raising new capital could be extremely hard,” said Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California, today in an e-mail.
A ratings cut may have “a material adverse effect on AIG’s liquidity” and trigger more than $13 billion in collateral calls from investors who bought protection from AIG through credit- default swaps, the insurer said in an Aug. 6 filing. The company was forced to put up $16.5 billion in collateral through July 31.
It now costs more to protect against an AIG default than it does to protect bonds of junk-rated casino operators MGM Mirage and Las Vegas Sands Corp. It costs $720,000 a year for protection on $10 million of MGM bonds and $675,000 for Sands.
Even before today, AIG’s credit-default swaps traded as if the company was rated B1, four levels below investment grade on the Moody’s Investors Service ratings scale and 10 levels under its actual rating of Aa3, according to data from Moody’s capital markets research group.
Inquiring minds needing a synopsis to date of the high stakes poker game should consider High Stakes Poker Update: Cinderella, Merrill Side Bets
AIG Tries To Stay Alive, Begs Fed For Cash
With that background out of the way let’s turn our attention to the “Hurricane Room” where it’s one on one poker as AIG Scrambles to Raise Cash, Talks to Fed.
Insurer American International Group Inc., succumbing to relentless investor pressure that drove its shares down 31% on Friday alone, is pulling together a survival plan that includes selling off some of its most valuable assets, raising more capital and possibly going to the Federal Reserve for help, people familiar with the situation said.
During a weekend scramble to shore up its finances, AIG turned down a capital infusion from a group of private-equity firms because it would have effectively given them control of the company, an 89-year-old giant that does business in nearly every corner of the world.
When AIG’s board rejected the capital infusion, the company’s recently appointed chairman and chief executive, Robert Willumstad, took the extraordinary step of reaching out to the Federal Reserve for help. The Fed usually deals with banks and brokers, and it wasn’t clear what it could do. New York Federal Reserve President Timothy Geithner didn’t respond to a request for comment and a company spokesman had no comment.
The rush for cash represents a remarkable comedown for AIG, whose role in global finance is in many ways as critical as investment banks such as Lehman Brothers. AIG’s troubles were one of the subjects at the weekend meeting of Wall Street chiefs and regulators at the New York Fed.
Eric Dinallo, the insurance superintendent in AIG’s home state of New York, took a significant role in the talks over the weekend, according to a person familiar with the matter. One key issue, the person said, was the proposed shift of assets. Insurers typically face stringent regulations on how they use their assets, as regulators seek to make sure that they can meet their obligations to policyholders.
The turmoil in housing and credit markets has hammered AIG, largely because of contracts it sold protecting others against losses tied to subprime loans and other risky assets. AIG’s stock has fallen nearly 80% this year. It reported a second-quarter net loss of $5.36 billion last month after a first-quarter loss of $7.81 billion.
Among its challenges: It doesn’t have access to the Fed’s lending window, as some other troubled financial firms do. It could face significant claims from Hurricane Ike, which battered the Texas coast over the weekend. It had to pay a stiff premium in August when it borrowed money in the corporate bond market.
Over the weekend, one group of private-equity firms, including J.C. Flowers & Co., proposed a deal that AIG rejected right away because it would have effectively given the firms control. J.C. Flowers didn’t respond to messages seeking comment.
“The numbers are too daunting,” said a senior executive at a large private-equity firm. Given AIG’s huge balance sheet, “we just don’t have enough capital to fill the hole.”
If AIG goes under it will be lock limit down in the market for more days than one.
Mike “Mish” Shedlock
Click Here To Scroll Thru My Recent Post List