Credit Rating Downgrades Hurt AIG Efforts to Raise Cash

September 16, 2008

American International Group Inc. shares plummeted in early trading Tuesday after the insurer’s credit ratings were cut, jeopardizing efforts to raise cash necessary for its survival.

In pre-market trading, AIG shares were down $1.83, or 38.4 percent, at $2.93. They closed at $22.76 as recently as Sept 8.

Late Monday, Standard & Poor’s cut New York-based AIG’s long-term credit rating three notches to “A-minus” from “AA-minus,” citing “reduced flexibility in meeting additional collateral needs and concerns over increasing residential mortgage-related losses.”

Moody’s Investors Service on Monday cut AIG’s rating two notches to “A2” from “Aa3,” while Fitch cut its rating two notches to “A” from “AA-minus.” Those agencies’ new ratings are the equivalent of one notch higher than S&P’s new rating.

The downgrades will make it much more difficult for AIG Chief Executive Robert Willumstad to raise cash. The company suffered $18 billion of losses in the last three quarters tied to guarantees it wrote on mortgage-linked derivatives.

AIG’s struggles are mounting a day after Lehman Brothers Holdings Inc filed for Chapter 11 bankruptcy protection because of its own losses tied to mortgages and real estate.

JPMorgan Chase & Co and Morgan Stanley are examining putting together a $70 billion to $75 billion credit facility for AIG, a person familiar with the matter said on Monday.

Those efforts are supported by the Federal Reserve, which received a request for help from AIG on Sunday.

On Monday, New York Gov. David Paterson said the state would allow some of AIG’s regulated insurance units to provide the parent company with $20 billion of liquid investments to address immediate liquidity needs.

(Reporting by Jonathan Stempel; editing by John Wallace)

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