By MARY WILLIAMS WALSH and MICHAEL J. DE LA MERCED 16 September 2008
Federal Reserve officials were in urgent talks with Goldman Sachs and JPMorgan Chase on Monday to put together a $75 billion lending facility to stave off a crisis at the American International Group, the latest financial services company to be pummelled by the turmoil in the housing and credit markets.
The talks, which began last week and continued through the weekend, added to the sense of agitation in the stock market Monday, as investors grappled with the implications of the bankruptcy of Lehman Brothers, which, like A.I.G., was a large counterparty to derivatives contracts held by countless financial institutions.
Shares in A.I.G. tumbled more than 60 percent on Monday morning as concerns grew that the firm lacked capital to withstand cuts to its debt rating, which appeared imminent. The company’s potential write-offs are mounting and may ultimately reach $60 billion to $70 billion, according to two people briefed on the situation.
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 ancillary credit-rating downgrades during the day, but as of Monday night had not seen its main debt ratings cut by Standard & Poor’s or Moody’s.
The complex discussions, continuing into the night as a deal was hoped for 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 honour its derivatives contracts, as they do with Lehman Brothers.
“It’s not just the failure of one company,” said Julie A. Grandstaff, vice president and managing director of StanCorp Investment Advisers. “It’s the ripple effect of the disappearance of counterparties” that was spurring urgent efforts to bolster A.I.G.
A large counterparty to derivatives contracts has not declared bankruptcy since the market grew to such enormous size, so Lehman will be a test. Financial officials fear another failure of a big counterparty could start a chain reaction.
The need to find fresh money for A.I.G. is bringing new layers of complexity to the credit crisis. As an insurance concern, A.I.G. has wholly different regulators and capital requirements than the banks and Wall Street firms that have suffered most of the huge losses so far. A.I.G. itself has had three chief executives in the last three and a half years, and one person briefed on Monday’s discussions said its officials seemed uncertain about how to proceed. The Fed was not able to provide the $40 billion bridge loan because it oversees banks, not insurers.
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.
The talks between A.I.G. and its regulators led to the announcement at midday by Gov. David A. Paterson of New York that the state would allow A.I.G. to borrow $20 billion from its own subsidiaries, to help bolster its capital in the face of potentially disastrous credit downgrades.
Mr. Paterson said he had authorized state insurance superintendent Eric R. Dinallo to include the $20 billion asset transfer in the broader plan being worked out at the New York Fed.
Normally state insurance regulations would prevent a holding company like A.I.G. from pulling assets out of its subsidiaries, which are insurance companies that need sufficient liquid resources to pay their claims.
But Mr. Paterson said the situation was dire.
“I hope you’re aware of the risks if we don’t act,” he told journalists at a midday news conference. “It is a systemic problem.”
Mr. Paterson said A.I.G. was “financially sound,” but was unable to tap the liquid assets in its subsidiaries because of regulatory constraints.
He stressed that New York taxpayers were not on the hook for the $20 billion. “No taxpayer dollars are involved,” he said.
A.I.G. is the parent of dozens of major insurance companies, and Mr. Paterson said it was possible for them to lend money to their corporate parent without putting their policyholders at risk, because the subsidiaries would receive some form of collateral. He said the collateral would consist of “illiquid assets,” but did not describe them.
Insurance sources said some of the money could be produced by exchanging assets between the holdings of A.I.G.’s life insurance subsidiaries and its property and casualty subsidiaries, which have different capital requirements. For instance, an A.I.G. property insurer might buy stock from an A.I.G. life insurer’s portfolio, paying for them with high-quality bonds from its own portfolio. Life insurers have tighter capital requirements than property insurers, so replacing stock with bonds would strengthen the life insurer’s capital structure, allowing it to send the surplus to the holding company.
Such a transfer would leave the life insurance company with investment assets that would produce less income, so the insurer would probably have to make up the difference by charging more for its life insurance policies, annuities and other products.
Spokesmen for A.I.G. and the New York State Insurance Department said they could not provide any details on which of A.I.G.’s insurance companies would be involved in the asset transfers, because the plan was not yet final.
The governor’s announcement appeared to help arrest the decline in A.I.G.’s stock. Trading below $4 shortly before noon, the shares briefly recovered to about $6, but ended down almost 61 percent at $4.76 from their Friday close.
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. One person close to the firm said that if such an event occurred, A.I.G. might survive for only 48 hours to 72 hours.
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.
Standard & Poor’s downgraded its long-term and short-term counterparty ratings on A.I.G. Monday evening.
But none of those downgrades appeared to be trigger events requiring A.I.G. to post billions of dollars of collateral to its swap counterparties. Its swap contracts cite downgrades by Moody’s and Standard & Poor’s of A.I.G.’s long-term senior debt ratings, and such changes had not been announced as of Monday evening. Being downgraded by two other widely watched ratings agencies, and having its standing as a counterparty by Standard & Poor’s downgraded, did not bode well for A.I.G., however.
People briefed on the matter said that if JPMorgan and Goldman Sachs were able to raise a $75 billion credit line by Tuesday, it could avert the all-important debt downgrades by Standard & Poor’s and Moody’s. But it was unclear whether they could put together such a complicated package in time.
A.I.G. has also considered sales of virtually all of its business assets, but conducting such sales quickly would be hard.
During the weekend, A.I.G. had been negotiating for a capital infusion from three private equity firms, people briefed on the matter said. But A.I.G. rejected an offer from J. C. Flowers & Company to buy $8 billion in preferred shares, because the bid included an option to buy the rest of the company at a steep discount.
Two other buyout firms, Kohlberg Kravis Roberts and the Texas Pacific Group, withdrew their offers to buy preferred shares as the Fed made clear that it would not provide any sort of backstop.
But Maurice R. Greenberg, the visionary leader who built A.I.G. but was removed during an accounting scandal in 2005, has offered to help with any restructuring. Mr. Greenberg and his lawyers asked on Saturday if he could play a role in overhauling A.I.G. The deadpan response, according to a person close to the company, was this: If you are willing to make a multimillion-dollar equity investment, we are happy to talk.
Mr. Greenberg has seen the value of his holdings plummet as A.I.G. shares have sunk. He holds about 39 million A.I.G. shares directly and an additional 243 million through his private equity firm, Starr International. The shares were worth about $15.8 billion at the beginning of this year, but just $1.3 billion as of Monday.
Jenny Anderson and Eric Dash contributed reporting.
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Fed Takes Steps to Aid A.I.G.
By MARY WILLIAMS WALSH and MICHAEL J. DE LA MERCED
16 September 2008
Federal Reserve officials were in urgent talks with Goldman Sachs and JPMorgan Chase on Monday to put together a $75 billion lending facility to stave off a crisis at the American International Group, the latest financial services company to be pummelled by the turmoil in the housing and credit markets.
The talks, which began last week and continued through the weekend, added to the sense of agitation in the stock market Monday, as investors grappled with the implications of the bankruptcy of Lehman Brothers, which, like A.I.G., was a large counterparty to derivatives contracts held by countless financial institutions.
Shares in A.I.G. tumbled more than 60 percent on Monday morning as concerns grew that the firm lacked capital to withstand cuts to its debt rating, which appeared imminent. The company’s potential write-offs are mounting and may ultimately reach $60 billion to $70 billion, according to two people briefed on the situation.
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 ancillary credit-rating downgrades during the day, but as of Monday night had not seen its main debt ratings cut by Standard & Poor’s or Moody’s.
The complex discussions, continuing into the night as a deal was hoped for 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 honour its derivatives contracts, as they do with Lehman Brothers.
“It’s not just the failure of one company,” said Julie A. Grandstaff, vice president and managing director of StanCorp Investment Advisers. “It’s the ripple effect of the disappearance of counterparties” that was spurring urgent efforts to bolster A.I.G.
A large counterparty to derivatives contracts has not declared bankruptcy since the market grew to such enormous size, so Lehman will be a test. Financial officials fear another failure of a big counterparty could start a chain reaction.
The need to find fresh money for A.I.G. is bringing new layers of complexity to the credit crisis. As an insurance concern, A.I.G. has wholly different regulators and capital requirements than the banks and Wall Street firms that have suffered most of the huge losses so far. A.I.G. itself has had three chief executives in the last three and a half years, and one person briefed on Monday’s discussions said its officials seemed uncertain about how to proceed. The Fed was not able to provide the $40 billion bridge loan because it oversees banks, not insurers.
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.
The talks between A.I.G. and its regulators led to the announcement at midday by Gov. David A. Paterson of New York that the state would allow A.I.G. to borrow $20 billion from its own subsidiaries, to help bolster its capital in the face of potentially disastrous credit downgrades.
Mr. Paterson said he had authorized state insurance superintendent Eric R. Dinallo to include the $20 billion asset transfer in the broader plan being worked out at the New York Fed.
Normally state insurance regulations would prevent a holding company like A.I.G. from pulling assets out of its subsidiaries, which are insurance companies that need sufficient liquid resources to pay their claims.
But Mr. Paterson said the situation was dire.
“I hope you’re aware of the risks if we don’t act,” he told journalists at a midday news conference. “It is a systemic problem.”
Mr. Paterson said A.I.G. was “financially sound,” but was unable to tap the liquid assets in its subsidiaries because of regulatory constraints.
He stressed that New York taxpayers were not on the hook for the $20 billion. “No taxpayer dollars are involved,” he said.
A.I.G. is the parent of dozens of major insurance companies, and Mr. Paterson said it was possible for them to lend money to their corporate parent without putting their policyholders at risk, because the subsidiaries would receive some form of collateral. He said the collateral would consist of “illiquid assets,” but did not describe them.
Insurance sources said some of the money could be produced by exchanging assets between the holdings of A.I.G.’s life insurance subsidiaries and its property and casualty subsidiaries, which have different capital requirements. For instance, an A.I.G. property insurer might buy stock from an A.I.G. life insurer’s portfolio, paying for them with high-quality bonds from its own portfolio. Life insurers have tighter capital requirements than property insurers, so replacing stock with bonds would strengthen the life insurer’s capital structure, allowing it to send the surplus to the holding company.
Such a transfer would leave the life insurance company with investment assets that would produce less income, so the insurer would probably have to make up the difference by charging more for its life insurance policies, annuities and other products.
Spokesmen for A.I.G. and the New York State Insurance Department said they could not provide any details on which of A.I.G.’s insurance companies would be involved in the asset transfers, because the plan was not yet final.
The governor’s announcement appeared to help arrest the decline in A.I.G.’s stock. Trading below $4 shortly before noon, the shares briefly recovered to about $6, but ended down almost 61 percent at $4.76 from their Friday close.
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. One person close to the firm said that if such an event occurred, A.I.G. might survive for only 48 hours to 72 hours.
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.
Standard & Poor’s downgraded its long-term and short-term counterparty ratings on A.I.G. Monday evening.
But none of those downgrades appeared to be trigger events requiring A.I.G. to post billions of dollars of collateral to its swap counterparties. Its swap contracts cite downgrades by Moody’s and Standard & Poor’s of A.I.G.’s long-term senior debt ratings, and such changes had not been announced as of Monday evening. Being downgraded by two other widely watched ratings agencies, and having its standing as a counterparty by Standard & Poor’s downgraded, did not bode well for A.I.G., however.
People briefed on the matter said that if JPMorgan and Goldman Sachs were able to raise a $75 billion credit line by Tuesday, it could avert the all-important debt downgrades by Standard & Poor’s and Moody’s. But it was unclear whether they could put together such a complicated package in time.
A.I.G. has also considered sales of virtually all of its business assets, but conducting such sales quickly would be hard.
During the weekend, A.I.G. had been negotiating for a capital infusion from three private equity firms, people briefed on the matter said. But A.I.G. rejected an offer from J. C. Flowers & Company to buy $8 billion in preferred shares, because the bid included an option to buy the rest of the company at a steep discount.
Two other buyout firms, Kohlberg Kravis Roberts and the Texas Pacific Group, withdrew their offers to buy preferred shares as the Fed made clear that it would not provide any sort of backstop.
But Maurice R. Greenberg, the visionary leader who built A.I.G. but was removed during an accounting scandal in 2005, has offered to help with any restructuring. Mr. Greenberg and his lawyers asked on Saturday if he could play a role in overhauling A.I.G. The deadpan response, according to a person close to the company, was this: If you are willing to make a multimillion-dollar equity investment, we are happy to talk.
Mr. Greenberg has seen the value of his holdings plummet as A.I.G. shares have sunk. He holds about 39 million A.I.G. shares directly and an additional 243 million through his private equity firm, Starr International. The shares were worth about $15.8 billion at the beginning of this year, but just $1.3 billion as of Monday.
Jenny Anderson and Eric Dash contributed reporting.
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