AIG reportedly seeks $40 billion loan from Fed
Insurer also expected to unveil big changes Monday
John Spence is a reporter for MarketWatch in Boston.
Monday, 15 September 2008
WASHINGTON (MarketWatch) -- American International Group Inc., beset by a record stock slump, is seeking a $40 billion bridge loan from the Federal Reserve, according to a media report early Monday.
It isn't clear if the Fed would grant the request from the insurance giant, the New York Times reported in its online edition.
AIG (AIG:12.14, -5.41, -30.8%) is scrambling to avoid a threatened downgrade from credit-rating agencies, the Times said. An unidentified person close to the company said AIG may survive only 48 to 72 hours after such a downgrade, the Times added.
AIG shares were down more than 45% in premarket trading Monday morning. Financial stocks fell around the globe as markets reacted to the collapse of Lehman Brothers (LEH:3.76, -0.46, -10.9%) . See related story.
On Sunday, The Wall Street Journal reported AIG could announce the sale of its aircraft-leasing business and other assets on Monday.
The company had been preparing for a major reorganization announcement on Sept. 25, but the Journal reported that AIG was hurrying to complete a plan that it would present Monday morning.
Friday, the firm said it was reviewing its operations and that "everything was on the table," suggesting it might sell assets to raise capital and avoid a crippling downgrade. Standard & Poor's said it might cut its rating if AIG didn't take steps to shore up its business.
Aside from potential asset sales, AIG is also seeking to raise more than $10 billion in capital, the Journal said. AIG has already raised about $20 billion in 2008.
AIG shares slumped a record 31% Friday on concern the world's largest insurer may be downgraded by ratings agencies, triggering billions of dollars in new capital needs. More than 300 million shares traded, another record, according to FactSet Research.
Standard & Poor's put AIG's ratings on CreditWatch with negative implications, suggesting the agency may downgrade the insurer in the future.
"Additional market value losses will place some strain on the company's resources," Standard & Poor's credit analyst Rodney Clark said in a statement. "AIG's potential access to the capital market may be more restricted in the short term."
AIG may sell its majority stake in reinsurer Transatlantic Holdings (TRH:57.20,-1.70, -2.9%) and other businesses to raise capital, analysts said.
"We're reviewing everything," Nicholas Ashooh, an AIG spokesman, said Friday. "Everything's on the table." At the time, Ashooh said there were no plans for a Monday announcement.
Yet given the sharp declines in AIG shares, the insurer is under pressure to announce changes as quickly as possible, Joshua Shanker, an analyst at Citigroup, said in a note to investors on Friday.
AIG has been hit hard by the housing crisis and credit crunch because the insurer's derivatives unit sold guarantees on mortgage-related securities known as collateralized debt obligations, or CDOs, using credit default swaps.
As house prices fall and the credit crunch deepens, the market value of these CDO exposures is dropping, forcing AIG to report big write-downs. AIG reported a quarterly net loss of more than $5 billion in August as it wrote down these exposures more and suffered impairments on some of its mortgage-related investments. See full story.
Investors and analysts are now worried that AIG could be downgraded again by ratings agencies. If that happens, the insurer's derivatives unit would have to post billions of dollars in extra collateral to support contracts with trading counterparties. That, in turn, has sparked concerns that the company will need to raise more capital.
With AIG shares slumping, it may be more difficult for the company to sell new shares to raise all the capital it may. That explains why the company is considering the sale of assets and other measures such as unwinding some of its derivative-based guarantees. Some investors have even called for the company to break itself up.
Alistair Barr is a reporter for MarketWatch in San Francisco.
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