Government Trying to Arrange Financing for AIG
The federal government has asked investment banks Goldman Sachsand JPMorgan Chase to lead a $70 billion to $75 billion lending facility to help struggling insurer American International Group, CNBC has learned.
The move appeared to confirm earlier reports that the government preferred that funds for AIG should come from private sources. Sources told CNBC Monday that AIG should not expect bridge financing from the Federal Reserve directly and should be "assessing all their private market options."
AIG, which is seeking a bridge loan of up $40 billion from the Federal Reserve, made an unprecedented approach to the Federal Reserve seeking short-term financing on Sunday, according to media reports.
The Fed normally oversees monetary policy and supervision of banks. AIG was seeking the funds as a temporary measure and planned to repay the Fed with the proceeds from asset sales.
And in another blow to AIG, Standard & Poor's Ratings Services it lowered its long-term counterparty rating on AIG to 'A-' from 'AA-' and its short-term counterparty credit rating on AIG to 'A-2' from 'A-1+'.
Standard & Poor's also said that it lowered its counterparty credit and financial strength ratings on most of AIG's insurance operating subsidiaries to 'A+' from 'AA+'. All of these ratings remain on CreditWatch with negative implications, where they were placed on Sept. 12, 2008.
AIG Gets New York State Assistance
Meanwhile, New York State will allow AIG to use $20 billion of assets held by its subsidiaries to provide cash needed for the troubled insurer to stay in business, Gov. David Paterson said.
The governor has also asked the head of New York's insurance department to talk with Federal regulators about providing an additional bridge loan to AIG. "AIG still remains financially sound," Paterson said.
The move will allow AIG to use those assets as collateral to borrow cash to fund its day-to-day operations, Paterson explained.
AIG has been battered over the past year by billions of dollars of losses tied to deterioration in the mortgage and credit markets.
Meanwhile, AIG is no longer in talks to receive help from billionaire investor Warren Buffett, CNBC has learned.
Talks about a possible investment by Buffett's Berkshire Hathaway took place Friday and Saturday but have not led to anything and have not resumed.
Shares of AIG
AIG shares have fallen about 80 percent since the start of the year.
Paterson said he had worked with AIG in a bid to help save New York jobs, with the insurer employing 6,000 in Manhattan and 8,600 statewide. He added that the plan was carefully crafted to pose no risk to New York taxpayers.
New York Insurance Superintendent Eric Dinallo is appealing to the federal government on AIG's behalf to provide it additional access to capital, Paterson said.
Huddle in New York
The New York Federal Reserve was hosting meetings Monday on the situation of embattled insurer AIG with representatives of the Treasury Department, financial services firms and state officials, an official said Monday.
"At the request of AIG and a consortium of financial institutions, we are providing premises to discuss the situation," a New York Fed spokesman said.
- Outlook: Why the Fed Won't Cut Interest Rates
A source told Reuters the New York Fed has hired Morgan Stanleyto review options regarding AIG. The Fed and the Treasury Department declined to comment.
The up-front cost of insuring $10 million of AIG's debt for five years jumped to $3.05 million from $1.3 million on Friday, in addition to annual payments of $500,000, according to Markit Intraday.
The insurer, which has incurred $18 billion in losses over the past three quarters from guarantees it wrote on mortgage derivatives, was hit on Friday by Standard & Poor's putting the company's credit ratings on negative watch, indicating a possible downgrade. Over the weekend, AIG executives and New York state insurance regulators scrambled to hatch a plan that would boost AIG's liquidity.
Several analysts, in research reports on Monday, warned that the company is unlikely to resemble itself after a much-anticipated restructuring. AIG has been considering "a wide range of options," the company said, including selling off valuable assets.
AIG, until recently the world's largest insurer, does business in 130 countries and territories around the world, selling insurance to 74 million customers worldwide. It has also an aircraft leasing arm, an asset management business and a financial products unit. The latter holds a credit default swap portfolio that has triggered the large mortgage losses.
Watch David Faber's report on AIG in the Accompanying Video
Former AIG CEO Maurice "Hank" Greenberg, who ran AIG for nearly four decades, was not involved in any of the discussions, said his spokesman, Glen Rochkind. "He repeatedly offered to assist in anyway he could," added Rochkind.
AIG, hit by $18 billion in losses over the past three quarters from guarantees it wrote on mortgage derivatives, has had to act quickly after Standard & Poor's said on Friday it may downgrade AIG's ratings.
Ratings downgrades could force AIG to post up to $14.5 billion more in collateral, according to a regulatory filing last month.
Downgrades could also be detrimental to AIG's insurance business, since some policies carry clauses that nullify a contract in the event of downgrades below a certain level.
Over the weekend, the insurer has been working on a three-part plan involving asset sales, shifting regulated capital from the insurance operations to the holding company, and working with private equity investors, said a person familiar with the negotiations.
Parties in capital-raising talks with AIG included buyout firms Kohlberg Kravis Roberts and J.C. Flowers, another person familiar with the talks said.
An AIG spokesman earlier confirmed the company was evaluating a wide range of options, including asset sales.
Media reports have said that one of the companies on the block was AIG's highly profitable aircraft leasing arm, but the spokesman declined to confirm this was the case.
In late June, AIG said the unit, International Lease Finance Corp, would remain part of AIG.
AIG was founded in China 89 years ago. In the years since, largely under Greenberg's watch, it grew into one of the world's largest insurers, spanning 130 countries and territories and serving 74 million customers.
Greenberg stepped down in 2005, in the midst of an accounting scandal. His successor, Martin Sullivan, was replaced by Willumstad in June after investors grew disgruntled over its three quarters of losses.
Greenberg owns or controls about 12 percent of AIG's stock, making him the largest shareholder.