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AIG Insurer Flirting with Bankruptcy Seeks Bailout Cash

Companies / Financial Crash Sep 16, 2008 - 07:21 AM GMT

By: Mike_Shedlock

Companies Best Financial Markets Analysis ArticleAmerican International Group (AIG) is on the verge of bankruptcy. It needs to raise $75 billion dollars quickly. That is a tough task in any market and a Herculean task in this one.

Fitch compounded AIG's woes on Monday with a downgrade of AIG to "A" .

Fitch Ratings said late Monday that it downgraded American International Group because the insurer's ability to raise capital for its holding company has become "extremely limited." Fitch cut the issuer default rating and outstanding debt ratings of AIG to A from AA-.

AIG is flirting with bankruptcy and all Fitch was willing to do was downgrade it to "A". Fitch did not downgrade Lehman (LEH) from "A" until Lehman went bankrupt. (See Moody's, Fitch, S&P, SEC are Useless for more details). The downgrade of AIG to "A" is further proof of just how useless Fitch's ratings are.

AIG's Race Against Time For Cash

The New York Times is reporting A Race for Cash at A.I.G.
Major credit ratings agencies downgraded the American International Group late Monday, worsening its financial health, as Federal Reserve officials and two leading investment banks were in urgent talks to put together a $75 billion line of credit to stave off a crisis at the company.

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.

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.

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.

AIG's derivative Bets Blowing Sky High

Here is what happened: AIG made the same stupid bets that Lehman and Bear Stearns did on mortgage backed security derivatives. It's losses are mounting. It needs $75 billion. From who and how will it get $75 billion?

Let's Borrow From Ourselves

The Washington Post is reporting N.Y. Will Let AIG Borrow $20 Billion From Its Own Subsidiaries

Scrambling to prevent another meltdown in the financial system, government officials in New York and Washington were trying to buy insurer AIG more time today and line up private loans of as much as $75 billion to rescue the troubled giant.

New York's governor said his state will allow AIG, the nation's largest insurer, to use $20 billion from its own insurance subsidiaries to ease a financial crunch.

By posting the assets as collateral, AIG can borrow money to run its day-to-day operations, Gov. David A. Paterson (D) said at a news conference. The move required special dispensation from the state regulator responsible for protecting the stability of AIG subsidiaries in New York and their policyholders.

My Comment : This a a glaring and galling mistake. Why even bother having regulators if they are purposely going to allow the breaking of rules like this?

J.P. Morgan, which is serving as AIG's financial adviser, was seeking support for a credit line of $70 billion to $75 billion that would be syndicated to multiple lenders, according to a source familiar with the discussions. That could spread the risk among institutions that can do something AIG can't: borrow from the Federal Reserve.

AIG has $1 trillion of assets and serves clients in 130 countries. Businesses and individuals rely on it for life insurance, retirement annuities, and coverage against all manner of calamities, from financial to natural disasters.

My Comment : Take a look at those needs carefully paying particular attention to life insurance and retirement annuities.

Paterson, a Democrat, said he hoped his step would pave the way for the federal government to assist AIG, and he urged the federal government to act.

My Comment : Once again some clown wants the government to assume all risk for private enterprise. So far we have had bailout calls for mortgage lenders, homebuilders, banks, brokerages, the automotive industry, and now insurance companies. Is there no end to such stupidity?

At the request of AIG, Timothy Geithner, president of the Federal Reserve Bank of New York, convened talks this morning at the New York Fed to discuss potential solutions to the insurance company's cash problems. The group included executives from large financial companies, particularly those that do extensive business with AIG.

My Comment : Expect another all night poker game. Odds are high it morphs into another game of Old Maid. See Fed Sponsored Poker Party Morphs Into "Old Maid" for details on the last poker party.

Paterson said his move was not a bailout and did not involve taxpayer money. In effect, the company would tide itself over by providing a loan to itself, he said.

My Comment : Paterson is a fool.

"It sounds like you're sacrificing the policyholders of those subsidiaries potentially for the parent company," said Donn Vickrey, founder of the financial research firm Gradient Analytics, which has been warning of trouble at AIG for months.

My Comment : Ding, Ding, Ding. We have a winner. "You're sacrificing the policyholders of those subsidiaries potentially for the parent company." Exactly.

"At this point the insurance companies are financially strong and solvent and fully able to meet any claims," David Neustadt, a spokesman for New York state insurance superintendent Eric R. Dinallo, said.

If the insurance subsidiaries were unable to cover policyholders' claims, a state guarantee fund financed by the insurance industry would provide a backstop, Neustadt said.

My Comment : Oh Really. What are the assets of the "guarantee fund"? Does it have $75 billion? $20 Billion?

Officials from the New York insurance department were at AIG, poring over documents to assess the quality of the assets the parent company would transfer to the subsidiaries, said Charlotte Hitchcock, New York's deputy secretary for labor and financial regulation.

"We're not going to allow them to put junk in the place of good stuff," Neustadt said.

My Comment : Neither Neustadt (nor anyone else) is qualified to decide what the "good stuff" is. If the stuff was really any good, why didn't and why hasn't AIG sold it already?


Let's tie it all together.

New York Gov. David A. Paterson (D) is going to violate regulations and allow AIG to borrow up to $20 billion from its subsidiaries. Timothy Geithner, president of the Federal Reserve Bank of New York approves this transaction. New York state insurance superintendent Eric R. Dinallo claims "At this point the insurance companies are financially strong and solvent and fully able to meet any claims." In the proposed swap-o-rama the spokesman for the superintendent claims "We're not going to allow them to put junk in the place of good stuff." (as if he has any clue).

Here's the Deal

If the "insurance companies are financially strong and solvent" why the hell do they need to raise $75 billion in another all night poker game with every rule in the book being broken to do so?

What's At Risk?

Life insurance policies, retirement annuities, and those with policy coverage against all manner of calamities, from financial to natural disasters are put at risk just so AIG can make good on a bunch of derivative bets gone bad.

Who Does AIG Owe?

This one should be easy to figure out: any bank or brokerage house scrambling like mad trying to "help" AIG raise cash so that it can pay off on its derivatives bets. The state insurance regulator is stupid enough to go along with this arrangement.

Here's a comment from the Kitco Voy Forum made by "MOA". I received this via email while writing this post.

Right now, illegally and with the regulators watching and nodding in agreement as it happens, lot's of bank deposits, life insurance savings and any unencumbered cash held in the system .... i.e. real life savings and earnings .... has suddenly been made available by the weekend rule changes by the Fed and US treasury. They are now being swept into accounts that hold the other side of the derivative trades.

The firewalls against fraud have been torn in expedience "to save the system from itself". The fraud and incompetence is running rife and has just been taken up another notch. There will be nothing left but the empty husk when the locusts and other assorted parasites have finished.

AIG is blowing all the policyholders protections with the assistance of New York insurance superintendent Eric R. Dinallo, Timothy Geithner, president of the Federal Reserve Bank of New York, and David A. Paterson, Governor of New York.

By Mike "Mish" Shedlock

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2008 Mike Shedlock, All Rights Reserved

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