A Race for Cash at A.I.G. as Ratings Are Downgraded
The credit downgrades are likely to force the company to turn
over billions of dollars in collateral to its derivatives trading
partners.
Without the financing, which was being arranged by
Goldman Sachs and
JPMorgan Chase in talks with
the Federal Reserve officials, A.I.G. might be forced to declare
bankruptcy, according to two people briefed on the situation.
The talks, which began last week and continued through the
weekend, added to the sense of agitation in the stock market on
Monday, as investors grappled with the implications of the
bankruptcy of
Lehman Brothers, which, like
A.I.G., was a large counterparty to derivatives contracts held by
countless financial institutions.
Shares in A.I.G. tumbled more than 60 percent on Monday morning
as concerns grew that the firm lacked capital to withstand cuts to
its debt rating, which were borne out later in the day. The
company’s potential write-offs are mounting and may reach $60
billion to $70 billion, according to two people briefed on the
situation.
Most of A.I.G.’s businesses are healthy, but its troubles grew
from one unit that dealt in complex debt securities and derivatives
and now threatens to drain cash more quickly than the financing
package can be assembled.
The day started off with news that A.I.G. had requested a $40
billion bridge loan from the Fed, a request that was rebuffed, and
ended with the word that its need had soared to $75 billion. The
firm suffered several credit-rating downgrades Monday evening,
including cuts by Standard & Poor’s and
Moody’s.
The complex discussions, continuing into the night as a deal was
sought before United States markets open on Tuesday, involved New
York state regulators, federal regulators, private equity firms and
Wall Street banks that rely on A.I.G.’s ability to honor its
derivatives contracts, as they do with Lehman Brothers.
“It’s not just the failure of one company,” said Julie A.
Grandstaff, vice president and managing director of StanCorp
Investment Advisers. “It’s the ripple effect of the disappearance
of counterparties” that was spurring urgent efforts to bolster
A.I.G.
A large counterparty to derivatives contracts has not declared
bankruptcy since the market grew to such enormous size, so Lehman
will be a test. Financial officials fear another failure of a big
counterparty could start a chain reaction.
The need to find fresh money for A.I.G. is bringing new layers
of complexity to the credit crisis. As an insurance concern, A.I.G.
has wholly different regulators and capital requirements than the
banks and Wall Street firms that have suffered most of the huge
losses so far. One person briefed on the matter said that potential
lenders doubted that the facility could come together without the
Fed’s backing.
A.I.G. itself has had three chief executives in the last three
and a half years, and one person briefed on Monday’s discussions
said its officials seemed uncertain about how to proceed. The Fed
was not able to provide the $40 billion bridge loan because it
oversees banks, not insurers.
The talks about backing up A.I.G. began last week, when the
company approached regulators, saying it was concerned that if a
deal could not be put together to save Lehman, A.I.G.’s own future
would be in doubt. A.I.G., through its financial products unit in
London, has exposure to the same mortgage-linked debt securities
that brought about the downfall of Lehman.
The talks between A.I.G. and its regulators led to the
announcement at midday by Gov.
David A. Paterson of New York
that the state would allow A.I.G. to borrow $20 billion from its
own subsidiaries, to help bolster its capital in the face of
potentially disastrous credit downgrades.
Mr. Paterson said he had authorized the state insurance
superintendent,
Eric R. Dinallo, to include the
$20 billion asset transfer in the broader plan being worked out at
the New York Fed.
Normally state insurance regulations would prevent a holding
company like A.I.G. from pulling assets out of its subsidiaries,
which are insurance companies that need sufficient liquid resources
to pay their claims.
But Mr. Paterson said the situation was dire.
“I hope you’re aware of the risks if we don’t act,” he told
journalists at a midday news conference. “It is a systemic
problem.”
Mr. Paterson said A.I.G. was “financially sound,” but was unable
to tap the liquid assets in its subsidiaries because of regulatory
constraints.
He stressed that New York taxpayers were not on the hook for the
$20 billion. “No taxpayer dollars are involved,” he said.
A.I.G. is the parent of dozens of major insurance companies, and
Mr. Paterson said it was possible for them to lend money to their
corporate parent without putting their policyholders at risk,
because the subsidiaries would receive some form of collateral. He
said the collateral would consist of “illiquid assets,” but did not
describe them.
Insurance sources said some of the money could be produced by
exchanging assets between the holdings of A.I.G.’s life insurance
subsidiaries and its property and casualty subsidiaries, which have
different capital requirements. For instance, an A.I.G. property
insurer might buy stock from an A.I.G. life insurer’s portfolio,
paying for them with high-quality bonds from its own portfolio.
Life insurers have tighter capital requirements than property
insurers, so replacing stock with bonds would strengthen the life
insurer’s capital structure, allowing it to send the surplus to the
holding company.
Such a transfer would leave the life insurance company with
investment assets that would produce less income, so the insurer
would probably have to make up the difference by charging more for
its life insurance policies, annuities and other products.
Spokesmen for A.I.G. and the New York State Insurance Department
said they could not provide any details on which of A.I.G.’s
insurance companies would be involved in the asset transfers,
because the plan was not yet final.
The governor’s announcement appeared to help arrest the decline
in A.I.G.’s stock. Trading below $4 shortly before noon, the shares
briefly recovered to about $6, but ended down almost 61 percent at
$4.76 from their Friday close.
Ratings agencies had threatened to downgrade the insurance
giant’s credit rating by Monday morning, a step that could allow
counterparties to A.I.G.’s swap contracts to require A.I.G. to post
collateral of up to $13.3 billion. The urgency of the talks grew by
late Monday as A.M. Best Company, a credit rating organization
specialized in insurance and health care companies, downgraded the
credit of A.I.G. and several of its major subsidiaries.
Fitch Ratings also downgraded
A.I.G.’s credit Monday evening.
Standard & Poor’s downgraded its long-term and short-term
counterparty ratings of A.I.G.. and Moody’s cut its rating of
A.I.G.’s senior debt, to levels requiring A.I.G. to post collateral
of up to $10.5 billion.
People briefed on the matter said that if JPMorgan and Goldman
Sachs were able to raise a $75 billion credit line by Tuesday, it
could avert an escalating series of collateral calls. But it was
unclear whether they could put together such a complicated package
in time.
A.I.G. has also considered sales of virtually all of its
business assets, but conducting such sales quickly would be
hard.
During the weekend, A.I.G. had been negotiating for a capital
infusion from three private equity firms, people briefed on the
matter said. But A.I.G. rejected an offer from J. C. Flowers &
Company to buy $8 billion in preferred shares, because the bid
included an option to buy the rest of the company at a steep
discount.
Two other buyout firms,
Kohlberg Kravis Roberts and the
Texas Pacific Group, withdrew their offers to buy preferred shares
as the Fed made clear that it would not provide any sort of
backstop.
But
Maurice R. Greenberg, the
visionary leader who built A.I.G. but was removed during an
accounting scandal in 2005, has offered to help with any
restructuring. Mr. Greenberg and his lawyers asked on Saturday if
he could play a role in overhauling A.I.G. The deadpan response,
according to a person close to the company, was: If you are willing
to make a multimillion-dollar equity investment, we are happy to
talk.
Mr. Greenberg has seen the value of his holdings plummet as
A.I.G. shares have sunk. He holds about 39 million A.I.G. shares
directly and an additional 243 million through his private equity
firm, Starr International. The shares were worth about $15.8
billion at the beginning of this year, but just $1.3 billion as of
Monday.
Source: New York Times
