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AIG Falls After Failing to Give Plan to Save Rating (Update1)
By Hugh Son
Sept. 15 (Bloomberg) --
American International Group Inc., the largest U.S. insurer by assets, fell by almost half in early trading as the company failed to present a plan to raise capital and stave off credit downgrades.
AIG executives spent yesterday in discussions with buyout firms including KKR & Co. and J.C. Flowers & Co. as the insurer sought to raise $20 billion in capital and sell $20 billion of assets, people familiar with the talks said. AIG later sought a $40 billion bridge loan from the Federal Reserve, the New York Times reported, citing an unnamed person.
Chief Executive Officer Robert Willumstad is under pressure to raise capital and sell units after three quarterly losses totaling $18.5 billion. Investors are concerned the New York- based insurer can't raise enough cash to withstand further writedowns from credit-default swaps, contracts AIG sold to protect fixed-income investors.
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AIG could be a much bigger problem than, say, Lehman'' Brothers Holdings Inc., the securities firm that filed for bankruptcy protection today, said Marc Faber, managing director of Marc Faber Ltd., in a Bloomberg Television interview.
Standard & Poor's said Sept. 12 it may downgrade AIG's credit ratings because the share declines may crimp the insurer's access to capital.
AIG fell $5.88, or 48 percent, to $6.26 at 8:05 a.m. in New York. The shares had fallen 79 percent this year before today, making it the worst performer in the Dow Jones Industrial Average.
`The Public Good'
A ratings cut may have ``a material adverse effect on AIG's liquidity'' and trigger more than $13 billion in collateral calls from debt investors who bought the swaps, the insurer said in an Aug. 6 filing. AIG has already posted $16.5 billion in collateral through July 31. A downgrade could also set off early termination of swaps that may cause $4.6 billion in payments, AIG said.
``It seems more and more likely that AIG may go to the Federal Reserve window to borrow cash at the discount rate, should the Fed allow it,'' said Citigroup Inc. analyst Joshua Shanker in a note to investors today in which he downgraded the company's shares to ``hold.''
``We believe AIG will survive, but we have little indication of how many business lines will ultimately need to be sold and how dilutive to shareholders' future capital raising efforts will be,'' Shanker said.
AIG spokesman Nicholas Ashooh and the Fed's Michelle Smith didn't return phone calls seeking comment.
The Federal Reserve yesterday widened the collateral it accepts for loans to Wall Street bond dealers as the financial industry braced for a Lehman bankruptcy filing. The 158-year-old securities firm filed a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today.
Federal Reserve
``The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets,'' Fed Chairman Ben S. Bernanke said in a statement released in Washington yesterday, said people familiar with the situation.
The buyout firms met with AIG executives in New York, said one of the people, who declined to be named because the talks were private. AIG is said to be working with advisers JPMorgan Chase & Co., Citigroup and Blackstone Group LP.
J.C. Flowers had offered $8 billion for a stake in the insurer that would have given the firm an option to buy the rest of AIG, the Times said.
Banking, Reinsurance
American General Finance, AIG's consumer lender, could fetch more than $6 billion if the unit sold for twice its book value. AIG Investments could sell for more than $3 billion if it sold for 2.5 percent of clients' assets under management. The company's stake in reinsurer Transatlantic Holdings Inc. is worth about $2.2 billion, based on the Sept. 12 share price.
Bank of America Corp. analyst Alain Karaoglan said Willumstad, 63, should reconsider the decision to keep its aircraft-leasing unit, International Lease Finance Corp. which could sell for $7 billion to $14 billion.
The insurer raised $20.3 billion in May by selling debt and equity, diluting the holdings of long-time investors. It's ``very hard to predict'' if AIG will need more capital, Willumstad said Aug. 7.
Dinallo, Paterson
New York Governor David Paterson and Insurance Superintendent Eric Dinallo have been ``very, very closely involved,'' in AIG's planning, said David Neustadt, a spokesman for Dinallo, in an interview yesterday. ``We've spent the last two days at AIG headquarters.''
AIG's former CEO and Chairman Maurice ``Hank'' Greenberg, who controls the largest stake in the insurer, wasn't involved in the company's planning this weekend and has ``repeatedly offered'' to assist the firm, said spokesman Glen Rochkind.
Greenberg, 83, saw the holdings decline by $3.1 billion last week. He controls 11 percent of AIG shares through two investment firms and personal holdings.
