| Us insurance giant aig raced
against the clock to avert collapse
tuesday after three blows to its
credit standing, and central banks
pumped out 160 billion dollars to
prop up financial markets.
aig was at risk of following lehman
brothers into bankruptcy despite
approval for it to borrow 20
billion dollars and as report said
the federal reserve had asked two
banks to help provide 70-75 billion
dollars.
markets, investors and savers
around the world focused on aig to
see if it would be the next failure
in the firestorm from the shocks on
wall street on monday, when another
investment bank merrill lynch was
bought out of trouble by bank of
america.
economist jeffrey sachs of columbia
university warned: "there is
more ahead. the us economy is
definitely going into recession ...
there's more financial turmoil
ahead."
stock markets fell for a second day
on widespread recognition that the
financial crisis is the worst since
the crash of 1929. the fall in
europe was smaller than on monday
but asia markets plunged and bank
shares everywhere were showing big
losses.
aig was in the eye of the storm as
the european central bank, and
british and japanese central banks
injected 160 billion dollars so
that banks, reluctant to lend to
each other, have funds.
the us treasury, as it had done for
lehman, ruled out using taxpayer
money to prop up aig.
the wall street journal, citing
people familiar with the situation,
reported that on monday the us
federal reserve asked goldman sachs
group and jp morgan chase to help
make 70-75 billion dollars in loans
available to aig.
new york state has thrown the only
lifeline of sorts to aig,
announcing monday that the company
can, in effect, loan itself 20
billion dollars, by borrowing
against its assets.
but even that failed to reassure
credit rating agencies. in blow
after blow late monday, the three
main agencies -- standard &
poor's, moody's and fitch
-- lowered aig's credit
score.
bottom line: they judge the
solvency of aig, the largest us
insurer, with a global reach, at
risk.
as a consequence, aig will need to
raise huge amounts in new capital
to survive, although it already has
sought billions of dollars to keep
it going.
the wall street journal reported
tuesday that people close to the
situation say aig may be forced
into filing for bankruptcy if it
cannot raise the money by
wednesday.
"the situation is dire,"
an anonymous source close to aig
told the journal.
the three ratings agencies gave
essentially the same reasons for
the downgrade: the us housing
crisis, to which aig is highly
exposed, and its share freefall.
on monday aig shares plummeted 61
percent to 4.76 dollars; they have
lost 93 percent of their value in a
year.
"the rating actions reflect
fitch's view that aig's
financial flexibility and ability
to raise holding company cash is
extremely limited," fitch said
in a statement.
standard & poor's ratings
services lowered its long-term
counterparty rating to
'a-' from 'aa-'
and its short-term counterparty
credit rating on aig to
'a-2' from
'a-1+' according to a
statement. moody's downgraded
aig to 'a2' from
'aa3' and fitch lowered
its rating to 'a' from
'aa.'
far more than other insurers, aig
has been a big player in a complex
parallel market called credit
default swaps (cds), financial
instruments in which wall street
companies take out a form of market
insurance against the risks of bond
default.
these products, often linked to the
us real-estate market, are at the
heart of the current banking crisis
and have led to massive write-downs
of assets around the world.
aig alone has written down 25
billion dollars amid spiking
defaults on us mortgage payments in
the united states.
in a filing with us market
regulator, the securities and
exchange commission, aig said it
would need 13.3 billion dollars to
meet its cds obligations, if
s&p and moody's lowered
its rating a notch.
moody's, in a dire warning,
said that "further downgrades
of the parent and certain operating
units are likely if the immediate
liquidity and capital concerns are
not fully addressed. such
downgrades could amount to multiple
notches."
the stakes are high for a company
that until only recently had been
long considered the world's
largest insurer. in the past year
it has been battered by the global
credit crunch and the worst us
housing slump in decades.
aig has 74 million customers
worldwide, most of them american,
who would find themselves without
insurance if the company goes
bankrupt. it employed 116,000
people in 130 countries at the end
of 2007.
according to us media reports,
among the assets aig is hoping to
sell is its aircraft leasing
business, international lease
finance corporation, which has a
fleet of 1,000 planes.
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9/
ap sources: $85b gov't bailout
of aig imminent by ieva m. augstums
and stephen bernard, ap business
writers
1 minute ago
the government is expected to
announce an $85 billion bailout of
the huge insurer aig, people with
knowledge of the situation said
tuesday, in a bid to avoid further
market upheaval. an announcement
from the government about the plan
was expected by 9:30 p.m. edt, the
people said.
if aig had failed, it could have
triggered a wave of problems for
banks around the world and opened
the ugliest chapter yet of the
financial meltdown that has slashed
billion of dollars from global
stock markets.
the people, who asked not to be
named because of the sensitive
nature of the negotiations, said
bankers and federal officials had
decided a government bailout of
american international group inc.
was the best solution to save it
from collapsing.
the people said the federal reserve
would receive warrants that could
be exchanged for an ownership stake
in the company in return for its
$85 billion loan. the ownership
stake could total close to 80
percent of the new york-based
insurance company, one of the
world's largest.
earlier, federal reserve chairman
ben bernanke and u.s. treasury
secretary henry paulson met with
sen. christopher dodd, d-conn.,
majority leader harry reid, d-nev.,
and house republican leader john
boehner of ohio, to brief them on
the government's option.
bernanke and paulson left the
meeting without commenting.
"at the administration's
request, i met this evening with
treasury secretary henry paulson
and federal reserve chairman ben
bernanke. they expressed the
administration's views on the
deepening economic turmoil and
shared with us their latest
proposals regarding aig," reid
told reporters. "the treasury
and the fed have promised to
provide more details in the near
future, which i believe must
address the broader, underlying
structural issues in the financial
markets."
on tuesday, shares of the insurance
company swung violently as rumors
of potential deals involving the
government or private parties
emerged and were dashed. by late
tuesday, its shares had closed down
20 percent — and another 45
percent after hours. still, no deal
emerged.
the problems at aig stemmed from
its insurance of mortgage-backed
securities and other risky debt
against default. if aig
couldn't make good on its
promise to pay back soured debt,
investors feared the consequences
would pose a greater threat to the
u.s. financial system than this
week's collapse of the
investment bank lehman brothers.
the worries were triggered after
moody's investor service and
standard and poor's lowered
aig's credit ratings, forcing
aig to seek more money for
collateral against its insurance
contracts. without that money, aig
would have defaulted on its
obligations and the buyers of its
insurance — such as banks and
other financial companies — would
have found themselves without
protection against losses on the
debt they hold.
"it might not just bring down
other financial institutions in the
u.s. it could bring down overseas
financial institutions," said
timothy canova, a professor of
international economic law at
chapman university school of law.
"if lehman brother's
failure could help trigger
aig's going down, who knows
who aig's failure could
trigger next."
new york-based aig operates an
insurance and financial services
businesses ranging from property,
casualty, auto and life insurance
to annuity and investment services.
those traditional insurance
operations are considered healthy
and the national association of
insurance commissioners said
"they are solvent and have the
capability to pay claims."
IF they filed for bankruptcy protection (which we now know won't happen with the gov't assistance) the life insurance holders should be fine. If anything they'd spin off the profitable insurance unit to a buyer in order to raise cash. AIG doesn't sell insurance...American General does (as does their other subsidiaries)....keep that in mind. AIG just owns American General.
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