AIG: Bankruptcy or Bailout?

NEW YORK (Reuters) – American International Group Inc (AIG.N) shares plummeted after the insurer’s credit ratings were cut, heightening concerns it might file for bankruptcy and cause more turmoil in global markets.

In afternoon trading, AIG shares were down $1.76, or 37 percent, at $3.00 on the New York Stock Exchange, after earlier falling as low as $1.25. The shares had fallen 60.8 percent on Monday. AIG is part of the Dow Jones industrial average .DJI, and Dow Jones Indexes said it was monitoring the situation.

Shares of AIG recovered some early losses after CNBC television said government money might be used in a bailout of the company, but they later fell after the network said U.S. Treasury Secretary Henry Paulson opposed that idea and that a private sector solution wasn’t likely.

New York Gov. David Paterson was getting federal officials to consider helping AIG following pressure from policyholders, CNBC said. The governor told the network that AIG has “a day” to solve its problems.

AIG is the latest company to be convulsed by a mortgage and credit crisis that this week led to a bankruptcy filing by Lehman Brothers Holdings Inc (LEH.P: Quote, Profile, Research, Stock Buzz) and the sale of Merrill Lynch & Co (MER.N: Quote, Profile, Research, Stock Buzz) to Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz).

Analysts said a bankruptcy filing by AIG wouldn’t necessarily include operating units, such as its profitable life insurance, property and casualty insurance, and aircraft leasing businesses.

If New York Insurance Commissioner Eric Dinallo were to declare AIG insolvent, the insurer could be liquidated, which could cause delays for policyholders awaiting payments on insurance claims, according to the New York Liquidation Bureau.

“The Federal Reserve is the only one with the balance sheet and wherewithal to deal with AIG’s problems,” said Keith Wirtz, chief investment officer of Fifth Third Asset Management in Cincinnati. Intervention “would be a huge relief,” he said.

The Fed declined to comment. AIG and Dinallo did not immediately return calls seeking comment.

CAPITAL NEEDED

Monday’s downgrades by the three major credit rating agencies will make it much more difficult for AIG Chief Executive Robert Willumstad to raise cash, and could trigger demands that the company come up with nearly $20 billion.

AIG late Sunday had asked the Fed for help, including a possible “bridge” loan to tide it over while it pursues asset sales and capital raising.

The central bank pushed JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) and Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) to try to put together a credit facility of $70 billion to $75 billion for New York-based AIG, a person familiar with the matter said on Monday.

“It’s in our national interest that AIG survive,” said Maurice “Hank” Greenberg, a former AIG chairman and a major investor in AIG. He told CNBC there could be “systemic risks” if AIG’s trading partners try to get out of their contracts.

Asked if an AIG bankruptcy were possible, he said if the company doesn’t get a bridge loan, new capital or relief from rating agencies, “then there’s no alternative, and that would be a disaster.”

In a Tuesday regulatory filing, Greenberg’s investment firm, C.V. Starr & Co, said it was evaluating its AIG stake and exploring options, including acquiring assets from AIG or “participating in a ‘going-private’ transaction.”

“HEIGHTENED PROBABILITY” OF BANKRUPTCY

AIG has suffered $18 billion of losses in the last three quarters tied to guarantees it wrote on mortgage-linked derivatives. It ended June with $1.05 trillion of assets. Its failure would likely be larger than that of Lehman, which said it ended August with $600 billion of assets.

“What is so infuriating to AIG is that it is solvent but facing near-term liquidity issues that could put it out of business,” said CreditSights Inc analyst Rob Haines. “There are a lot of salable assets, but they need to be given time.”

Credit Suisse analyst Thomas Gallagher halved his price target on AIG to $3, citing the “heightened probability” of a bankruptcy filing.

“While there is a chance the company can work its way through its liquidity problems if it can secure substantial bridge financing, we think this will be challenging to execute in the current onerous credit environment,” he wrote.

AIG operates in more than 100 countries and ended 2007 with 116,000 workers, more than four times as many as Lehman.

“For AIG, especially, international help would not be unrealistic,” Rudolph Giuliani, a former New York City mayor, said at a hedge fund conference in Greenwich, Connecticut.

DOWNGRADES

Late Monday, Standard & Poor’s cut AIG’s long-term credit rating three notches to “A-minus” from “AA-minus,” citing “reduced flexibility in meeting additional collateral needs and concerns over increasing residential mortgage-related losses.”

Moody’s Investors Service on Monday cut AIG’s rating two notches to “A2” from “Aa3,” while Fitch Ratings cut its rating two notches to “A” from “AA-minus.”

The downgrades mean that AIG’s trading partners can require the insurer to post an additional $14.5 billion of collateral, according to an August 6 regulatory filing. They could also result in the early termination of some contracts, requiring an additional $5.4 billion of payments, the filing shows.

Greenberg estimated the company could raise $20 billion from asset sales if given the time.

On Monday, Paterson said New York would let AIG essentially loan itself $20 billion by shifting liquid investments to itself from some of its regulated insurance units.

AIG’s 5.85 percent notes maturing in 2018 fell 9 cents on the dollar to 38 cents, yielding 21.51 percent, the Financial Industry Regulatory Authority bond pricing service Trace said.

Investors on Tuesday were paying $5.2 million up front plus $500,000 annually to protect $10 million of AIG debt against default for five years, up from $3.3 million up front on Monday, according to Phoenix Partners Group.

By Lilla Zuill and Jonathan Stempel
(Additional reporting by Jennifer Ablan, Dena Aubin, Karen Brettell, Kristina Cooke, Mark Felsenthal, Joan Gralla, Svea Herbst-Bayliss, Daisy Ku, Chris Sanders and Jonathan Spicer; editing by John Wallace)