Shares of American International Group Inc. plunged 53 percent Monday as investors grew increasingly nervous after the insurer, once the world’s most valuable insurer by market value, failed to deliver a rescue plan.
AIG, hit by $18 billion in losses over the past three quarters from guarantees it wrote on mortgage derivatives, worked feverishly to hatch a plan that would stave off rating downgrades, after Standard & Poor’s threatened to cut the insurer’s ratings on Friday.
Other major rating agencies have also put the New York-based firm’s credit ratings on negative watch.
Rating downgrades could force AIG to post up to $14.5 billion more in collateral for credit default swaps that insured mortgage-linked derivatives, according to a regulatory filing last month.
Downgrades could also prove detrimental to AIG’s insurance business, since policies often carry clauses that nullify a contract in the event of downgrades below a certain level.
According to reports late Sunday, the insurer turned to the Federal Reserve for $40 billion in bridge financing to ward off a liquidity crisis and rating downgrades, but by Monday morning no details had emerged on a potential AIG rescue plan, which is also expected to include asset sales.
AIG scrambled to secure a Fed lifeline on one of the worst-ever days on Wall Street, with Lehman Brothers Holdings Inc filing for bankruptcy protection and Bank of America Corp.’s agreeing to take over Merrill Lynch & Co. Inc.
AIG shares dropped $6.44 to $5.70 on the New York Stock Exchange, where it fell as low as $5.82. The shares have fallen 80 percent this year and closed Friday at $12.14.
Protection costs on AIG debt also surged. The upfront cost of insuring $10 million of AIG debt for five years jumped to $3.05 million from $1.3 million on Friday, in addition to annual payments of $500,000, according to Markit Intraday.
AIG may have solicited eleventh-hour help from billionaire Warren Buffett, according to a report in U.K. trade publication, the Insurance Insider.
A call to Buffett’s Berkshire Hathaway Inc was not immediately returned.
AIG officials did not return calls seeking comment.
Several analysts said in research reports on Monday that AIG would likely be a vastly changed company after the much-anticipated restructuring. AIG said it has been considering “a wide range of options,” including selling off valuable assets.
“At the end of the day, it’s a real prisoner’s dilemma,” Wachovia analysts wrote in a research note. “Capital options are plenty, but unfortunately AIG will have to likely cut into bone and sell good assets that are earning good returns to support the collateral needs of bad assets earning nothing.
“We don’t see how AIG gets through the most recent concerns without raising capital.”
AIG does business in 130 countries and territories around the world, selling insurance to 74 million customers worldwide.
It also has an aircraft leasing arm, an asset management business, and a financial products unit. The latter holds a credit default swap portfolio that has triggered the large mortgage losses.
(Reporting by Lilla Zuill, additional reporting by Karen Brettell; Editing by John Wallace/Jeffrey Benkoe)
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