Update: AIG Cash Crisis Mounts; Greenberg Explores Buyout; Conservatorship Reportedly Eyed

By and | September 16, 2008

American International Group Inc. shares sank 48 percent on a report that regulators might take control of the giant insurer, though a U.S. government source said federal agencies do not have legal authority to put AIG into a conservatorship.

Bloomberg News reported the government was mulling a conservatorship, citing two people briefed on the negotiations. AIG has been battered by losses on mortgages in its securities portfolio.

The U.S. official told Reuters Tuesday no federal agency has the authority to institute a conservatorship. Insurance companies are typically regulated by states, not by U.S. agencies, so the legal authority for a conservatorship doesn’t rest with federal authorities, the source said.

AIG, in a statement, did not address the report, but said it is trying to boost short-term liquidity, and that its plans will not reduce capital at any unit or tap into Asian operations for liquidity. It said its operating units are operating normally and are “fully capable” of paying claims.

The Federal Reserve and the U.S. Treasury Department were not immediately available for comment.

“This is not good,” said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams. “It puts more strain on our taxpayers, more strain on our government, puts us more in debt, and what’s next? But they can’t let it fail, there’s no way. It would be mayhem.”

AIG shares slid to $1.95 in after-hours trading. The stock down 21 percent at $3.75 on the New York Stock Exchange on volume topping 1.1 billion shares.

The insurer’s credit rating was cut Monday by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings, heightening concern it might file for bankruptcy, and cause more turmoil in global markets.

“They’re too big to fail,” Anton Schutz, a portfolio manager at Mendon Capital Advisors in Rochester, New York, said of AIG. “It would be much more of a disorderly event if it went bankrupt than it was with Lehman.”

AIG has hired the law firm Weil, Gotshal & Manges LLP, which is also handling Lehman’s bankruptcy, the New York Times reported on its website on Tuesday.

AIG is the latest company to be convulsed by a mortgage and credit crisis. Lehman Brothers Holdings Inc filed for bankruptcy protection and Merrill Lynch & Co agreed to sell itself to Bank of America Corp this week.


Last week, the government put troubled mortgage finance companies Fannie Mae and Freddie Mac into a conservatorship, where their regulator assumed control until their businesses were restored to health.

That arrangement allowed their stock to keep trading, but put common shareholders last in line to recover on claims.

In a Tuesday regulatory filing, former AIG Chairman Maurice “Hank” Greenberg’s investment firm C.V. Starr & Co said it was considering a bid for control of the company through a buyout.

CNBC reported that Greenberg sent a letter to AIG Chief Executive Robert Willumstad complaining that the insurer had rejected his offer of help.

“It’s in our national interest that AIG survive,” Greenberg said on CNBC. He added that there could be “systemic risks” if AIG’s trading partners try to get out of their contracts.

Asked if an AIG bankruptcy were possible, he said if the company doesn’t get a bridge loan, new capital or relief from rating agencies, “then there’s no alternative, and that would be a disaster.”

Greenberg was not available for comment.

New York Gov. David Paterson was getting federal officials to consider helping AIG, following pressure from policyholders, CNBC reported. The governor told the network that AIG has “a day” to solve its problems.

The Fed had pushed JPMorgan Chase & Co and Morgan Stanley to try to put together a credit facility of $70 billion to $75 billion for AIG, a person familiar with the matter said Monday.

Analysts said a bankruptcy filing by New York-based AIG wouldn’t necessarily include operating units, such as its profitable life insurance, property and casualty insurance, and aircraft leasing businesses.


“AIG is vitally important to the New York economy and the national finance system,” New York Attorney General Andrew Cuomo said in a statement. “We do support the Federal Reserve being part of a private sector effort to stabilize AIG.”

The insurer has recorded $18 billion of losses in the last three quarters tied to guarantees it wrote on mortgage-linked derivatives. It ended June with $1.05 trillion in assets. Its failure would likely be larger than that of Lehman, which said it ended August with $600 billion of assets.

“What is so infuriating to AIG is that it is solvent but facing near-term liquidity issues that could put it out of business,” said CreditSights Inc analyst Rob Haines. “There are a lot of salable assets, but they need to be given time.”

Greenberg estimated the company could raise $20 billion from asset sales if given the time.

AIG operates in more than 100 countries and ended 2007 with 116,000 workers, more than four times as many as Lehman.

Late Monday, Standard & Poor’s cut 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 cut AIG’s rating two notches to “A2” from “Aa3” Monday, while Fitch Ratings cut its rating two notches to “A” from “AA-minus.”

The downgrades mean that AIG’s trading partners can require the insurer to post an additional $14.5 billion of collateral, and make $5.4 billion of payments if some contracts are terminated early, according to an Aug. 6 regulatory filing.

On Monday, Paterson said New York would let AIG essentially loan itself $20 billion by shifting liquid investments to itself from some of its regulated insurance units.

AIG’s 5.85 percent notes maturing in 2018 closed down 14.2 cents on the dollar to 32.8 cents, yielding 24.38 percent, according to the Financial Industry Regulatory Authority bond pricing service Trace.

Late Tuesday, investors paid $4.5 million up front plus $500,000 annually to protect $10 million of AIG debt against default for five years.

(Additional reporting by Jennifer Ablan, Dena Aubin, Paritosh Bansal, Karen Brettell, Kristina Cooke, Mark Felsenthal, Joan Gralla, Svea Herbst-Bayliss, Daisy Ku, Chris Sanders, Glenn Somerville and Jonathan Spicer; editing by John Wallace and Jeffrey Benkoe)

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