September 16, 2008 04:44 AM UTC

Financial crisis deepens

• 2 Comments
• by: Ray Springfield

http://online.wsj.com/article/…

To those who don’t believe that the “sky is falling” perhaps they should have a heads up.

The fact that Paulson permitted Lehman to go under disturbs greatly.

AIG Seeks Huge Loan

As Stock Dives 61%

By MATTHEW KARNITSCHNIG and LIAM PLEVEN

September 16, 2008

American International Group Inc., its shares in free-fall, struggled Monday to pull off a tangled deal that involved placating state and federal regulators, convincing banks to give it a huge loan and staving off the credit-rating agencies that hold the giant insurer’s fate in their hands.

Late Monday, Standard & Poor’s cut AIG’s credit rating by three notches but it was unclear what direct effect the move would have on the company’s abilities to meet its obligations.

AIG stock fell 61% in 4 p.m. trading Monday, knocking more than $18 billion off the company’s stock-market value. Investors feared the worst for the company as it became trapped in the massive decline in shares of financial companies that have been tarred by their holdings of securities tied to mortgages.

The company, one of the world’s most important financial institutions, turned to the government in earnest after a weekend where intense efforts failed to produce a plan to raise roughly $40 billion in capital. AIG needs the money to sidestep a potentially fatal downgrade by credit-rating firms.

With AIG now tottering, a crisis that began with falling home prices and went on to engulf Wall Street has reached one of the world’s largest insurance companies, threatening to intensify the financial storm and greatly complicate the government’s efforts to contain it. The company is such a big player in insuring risk for institutions around the world that its failure could undermine the global financial system.

The Federal Reserve, which is being advised by Morgan Stanley, hosted a meeting to discuss AIG’s prospects at the central bank’s offices in New York on Monday with company executives, a host of bankers and state regulators, as well as Treasury and Fed officials.

With strong encouragement from the Fed, Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. are seeking to raise $70 billion to $75 billion in loans to help prop up AIG, according to people familiar with the situation. Word of AIG’s efforts to borrow that much sent the stock market tumbling in the last hour of trading, which made Monday the worst percentage decline in six years.

Analysts believe that AIG’s insurance businesses remain healthy. But its losses over the past year have made the major credit-rating agencies skeptical of its ability to raise enough capital to offset the losses. If it can’t come up with the cash, the company could be forced into bankruptcy proceedings. On Monday, after the market closed, Fitch Ratings downgraded the company by two notches.

In New York, where AIG is based, Gov. David Paterson announced Monday that state officials are working with the insurer on a plan that would allow the firm to, in effect, loan itself $20 billion, by borrowing against its assets. The state would allow the company to shift assets that are subject to tight regulation in order to give the company better liquidity in the short term.

The private loans facilitated by banks, were they to become available, would provide a huge measure of relief to AIG. The insurer had sought a bridge loan from the Fed to tide it over until it was able to sell some assets, but Fed officials are not inclined to provide one, especially right after spurning Lehman Brothers. The Fed’s failure to come to Lehman’s aid forced the firm to file for Chapter 11 bankruptcy protection Monday.

At a midday news conference, U.S. Treasury Secretary Henry Paulson said AIG’s meetings with federal officials had “nothing to do with any bridge loan from the government” and rather represented a private-sector effort that was important to the “financial system.”

Indeed, the company’s woes could pose problems in many corners — a concern that has the federal government on watch. AIG’s massive assets mean that its millions of traditional insurance customers will likely get claims paid, no matter what happens next. But AIG’s shares and debt are widely held, and the firm is used by many companies world-wide to manage a range of risks, including exposure to investments in subprime mortgages. Its demise would potentially make it harder or more expensive for businesses to control their risks.

AIG had hoped to have a comprehensive plan in place before the start of trading on Monday. It was unable to broker a deal in time and made no public pronouncements about its plans. But each day lost can make it harder to craft a solution. On Monday, nervous investors continued to hammer its stock. AIG’s share price closed at $4.38 on Monday in composite trading on the New York Stock Exchange, down $7.38, and is down 92% for the year.

The lower the stock price, the harder it can be for the firm to raise capital.

AIG’s businesses include selling life and property-casualty insurance policies. It operates in more than 100 countries around the world. With more than 100,000 employees world-wide, AIG has a sprawling portfolio of companies that also includes units that make consumer loans and lease aircraft.

AIG’s business selling credit protection against the possibility of default in a variety of assets, including subprime mortgages, set it apart from most other insurers and tied it more closely to the fate of the housing and credit markets.

When the housing market began to spiral downwards, the value of those contracts plunged. That issue is at the heart of AIG’s massive losses, which have totaled $18 billion over the last three quarters.