Sunday 14 September 2008

Next casualty? Investors eye AIG

Investors skittish about further losses in the financial industry have pounced on American International Group, the beleaguered insurance company that has reported some of the biggest losses in the spreading credit crisis
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Guanyu said...

Next casualty? Investors eye AIG

By Mary Williams Walsh and Jonathan D. Glater
September 12, 2008

NEW YORK: Investors skittish about further losses in the financial industry have pounced on American International Group, the beleaguered insurance company that has reported some of the biggest losses in the spreading credit crisis.

With Lehman Brothers running out of options in the past week, investors fear that AIG will face billions in additional losses because it has effectively guaranteed complex financial instruments tied to home loans whose values have plummeted. If so, it too could need to raise capital, which Freddie Mac, Fannie Mae and Lehman have demonstrated can be a vexing problem in the current market environment.

The company’s chief executive, Robert Willumstad, is expected to present a broad plan on Sept. 25 to turn the company around, but investors are increasingly impatient. Lehman also had promised to deliver a plan in a couple of weeks, but was pushed to make an announcement in the past week in what proved to be an unsuccessful attempt to reassure investors.

On Friday, AIG shares were down about 28 percent in afternoon trading at $12.63, off $4.92.

AIG stock lost nearly a fifth of its value Tuesday as investors watching the Lehman drama focused on others that might have to raise money. Since Willumstad took over in June, succeeding Martin Sullivan amid mounting losses, the stock has fallen nearly 50 percent.

U.S. stocks rallied broadly at the end of trading Thursday, with investors relieved that a deal for Lehman and perhaps even one for Washington Mutual, the troubled savings and loan, appeared to be in the works. AIG shares gained 5 cents to close at $17.55.

Losses have been mounting at AIG. It reported a loss of $5.3 billion for the second quarter, after a $7.8 billion loss in the previous quarter. The main problem is sophisticated contracts, called credit default swaps, that AIG’s financial products unit sold to investors.

The contracts allow buyers to bet on the creditworthiness of debt obligations backed by mortgages. As home values have fallen, the values of those underlying mortgages have declined, requiring AIG reduce the value of the swaps on its books.

Willumstad declined to comment on AIG’s stock price Thursday, but a company spokesman, Nicholas Ashrooh, said market pressure would not speed the new business plan.

“In the meantime, there’s a lot of work going on to determine the best future course for AIG,” Ashrooh said. “The focus is on doing what’s right for the shareholders and the future of AIG.”

A sliver of good news came Thursday when AIG announced a $115 million settlement of a lawsuit filed by shareholders on behalf of the company. AIG is to receive $85 million in insurance payments covering its directors and officers, and $29.5 million from four former officers. The former officers were accused of breaching fiduciary duties by redirecting insurance business that generated hundreds of millions of dollars in commissions to another company they controlled.

Simultaneously, Maurice Greenberg, AIG’s former chief executive and one of the former officers, began the first of what is expected to be three grueling days of depositions in a civil lawsuit brought against him by the office of the New York State attorney general, Andrew Cuomo. The lawsuit accuses Greenberg of devising transactions to make AIG’s financial condition look stronger.

AIG’s board removed Greenberg in 2005, after regulators served AIG with subpoenas. He was succeeded by Sullivan, a former co-chief operating officer of AIG, who oversaw the restatement of the company’s financial results covering a five-year period. But calm did not return. Instead, the mortgage crisis ensnared the company.

Perhaps the most pressing concern for investors is the exposure to falling home values. AIG has warned investors that more write-downs, into the billions of dollars, are possible.

To maintain its overall financial strength as its assets are falling in value, the company may have to raise new capital. If AIG issued new shares, shareholders could find the value of their existing shares diluted.

This month, an analyst at Citigroup Global Markets, Joshua Shanker, issued a report saying that while new shares “could be extremely dilutive,” he did not think that selling stock would be the company’s only option for raising capital. AIG could sell off certain operations, for instance, or shrink its insurance business in unprofitable markets.

AIG outlined some of its risks in a regulatory filing with its second-quarter results. If one of the major credit rating agencies were to downgrade AIG’s debt, the company could be required to post additional collateral on contracts, the company said.