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 withdraw 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.
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 all three 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.
AIG’s Market Cap is only $32.6 Billion. Barring some miracle, AIG’s cap will be worth far less than that at the open. $20 billion would not surprise me, especially since it is holding much of the same garbage Lehman will be forced to dump. AIG should not have turned down the private equity opportunity it did earlier today. The Fed should not provide a penny.
I suspect the ratings agencies will be asked to not downgrade AIG. I also suspect the rating agencies will honor the request citing unfair stress or some other nonsense. The hope will be what it always is: to buy time.
Mike “Mish” Shedlock
Click Here To Scroll Thru My Recent Post List