Update: 810 PM EDT: Rush Is On to Prevent A.I.G. From Failing
Update: 1045 PM EDT: A.I.G. Seeks $40 Billion in Fed Aid to Survive
Update: 810 AM EDT: See my post on what to expect this morning in the market and my (cursory) analysis of the BofA-Merrill deal. Lots of other news on the home page today. This will be the biggest trading day of the year.
On Friday, I wrote that AIG, WaMu and Lehman were the big newsmakers. I just posted about Lehman Brothers – they will either be bought, be bailed out or default. Now, it’s AIG’s turn. What are they doing to quell investor worries? According to the FT, they are looking to raise a shed load of cash: up to $20 billion.
The Financial Times says that AIG has approached the buy-out community to help it raise the capital. In particular, they are talking to TPG, JC Flowers and KKR. With AIG the unfortunate insurer of choice on massive amounts of credit default swaps (CDS) and Fannie and Freddie exposing the CDS market to huge losses, one can imagine that the insurer will have more losses to come in the tens of billions.
AIG, the U.S. insurer, is seeking to raise $10bn-$20bn in equity from buy-out investors Kohlberg Kravis Roberts, TPG, and JC Flowers, as part of an emergency plan to shore up its balance sheet.
It also aims to restructure its debt and sell up to $20bn in assets, according to people close to the company.
Any funds from KKR, TPG and JC Flowers would come on top of the $20bn-plus that AIG raised earlier this year.
AIG, which has suffered $18.5bn in losses in the past three quarters, is also considering selling businesses including its Transatlantic Holdings reinsurance group, its consumer finance group, its financial products division, and a leasing unit.
AIG’s significant exposure to the real estate and credit default swaps (CDS) market has prompted ratings agencies to threaten to cut its credit ratings, a move that could require the insurer to amass billions of dollars in extra collateral.
The company’s share price dropped more than 30 per cent on Friday amid concerns over its involvement in the business of writing insurance against defaults on mortgage bonds.
The cost of buying protection against a default on AIG’s debt, using credit default swaps, leapt to record levels on Friday, and its bonds traded at distressed levels.
Remember, AIG was a AAA-rated company just a short while ago — one of the few rock solid companies so rated. You can count the number of AAA companies in the S&P 500 on your fingers – a list that includes General Electric and Berkshire Hathaway.
Those days are long gone for AIG. The company has no hope of a triple-A rating. The most it can hope for at this point in the credit crisis is to survive the crisis as a going concern. I guess derivatives are weapons of financial mass destruction.
I cannot stress enough the dire nature of the credit crisis right now. Lehman Brothers is on the brink of collapse as we speak. Now, we have to worry about AIG too? This is looking like financial Armageddon more and more every day. I tell you, given that AIG has a balance sheet of over $1 trillion, the U.S. authorities had better come up with a solution to these financial problems PDQ or we are headed for an apocalyptic ending to this crisis.