AIG And Its Problems

AIG, down 40 percent this week, is again the subject of intense debate. The main problem is their significant exposure to the credit default swap market, where no one can quite figure out what the exact level of exposure could be.

They are hosting an analyst meeting September 25th. There is some discussion that they may announce some kind of capital raising program and possibly a sale of assets. But a capital raise is problematic for several reasons:

1) they last raised capital ($20 b) in May, when the stock was near $40; today it is $13;

2) credit spreads have widened;

3) there are fewer U.S. investors available, and foreign investors have been badly burned by their U.S. investments in the first half of the year.

Still, they may have few other choices: ratings downgrades are a definite possibility. Moody's on August 7th, a day after AIG earnings came out, bluntly warned AIG that their affirmation of their debt ratings was based on an understanding that AIG "will actively address potential liquidity and captial needs at various operating units...failure to address these concerns in the near term could lead to rating downgrades..."

Another strong possibility is sale of assets, including their aircraft leasing division, which some feel could fetch $8 billion or more.


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