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AIG Shares Plummet on Fresh Mortgage Market Concerns

By | September 10, 2008

Shares of American International Group Inc., the world’s biggest insurer, fell sharply Tuesday as investors worried that the company’s large exposure to mortgage markets could trigger the need to raise fresh capital.

Investors, who have already weathered $25 billion in mortgage-linked losses over the past three quarters, are growing increasingly skittish ahead of a special meeting for a restructuring to be held later this month.

Fears that AIG could announce another round of draining write-downs are being stoked by concerns that other financial services firms, such as Lehman Brothers Holdings Inc., may be bracing for new mortgage losses, necessitating a new scramble for capital.

“AIG is in a weak position as either a seller of equities or assets,” said Clifford Gallant, an insurance analyst with Keefe, Bruyette & Woods.

“Either way there is the risk of charges or dilution” for investors, Gallant added.

AIG shares fell $4.39, or 19.29 percent, to a 13-year low of $18.37 on the New York Stock Exchange. The drop left the insurer with a market capitalization of roughly $49.25 billion — nearly $12 billion lower than at the start of the day.

The percentage decline was the biggest drop in more than two decades. Lehman shares dropped nearly 45 percent.

AIG shares have lost close to 70 percent of their value since the beginning of the year, as the insurer has recorded steep unrealized losses on credit default swaps that guarantee mortgage-linked securities. It raised more than $20 billion earlier this year, heavily diluting investors.

AIG’s most recent attempt to boost its coffers was through a private sale of $3.25 billion in new debt last month. While not dilutive to common shareholders, it came at a price with the issuance bearing much higher costs than debt sold by the insurer before it was beset by mortgage woes.

SEPT. 25 MEETING

An AIG spokesman declined to comment on whether or not the insurer may need to boost capital once more, saying the company was in the midst of a strategic review.

AIG’s new chief executive, Robert Willumstad, is due to unveil a sweeping turnaround plan for the insurer on Sept. 25, which could include carving the company into smaller parts.

Willumstad, at the time of AIG’s release of second quarter results last month, said capital levels were “satisfactory,” at least for the time being.

Analysts have estimated that AIG may need to raise up to $15 billion more in fresh capital.

Much may depend on any changes to the company’s credit ratings since further downgrades could necessitate the posting of billions of dollars more in collateral, according to an Aug. 6 filing with the U.S. Securities and Exchange Commission.

Selling or spinning off the financial products unit, home to the thorny credit default swaps, would likely alleviate credit concerns. But AIG could find it tough to convince counterparties to sign off on such a deal, if it means guarantees would no longer be backed by AIG’s financial strength ratings, and capital position.

(Editing by Gerald E. McCormick, Bernard Orr)

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