AIG
The next big one?
The US insurance giant is in dire trouble; Anxious Singaporeans queue outside central office to inquire about their policies - estimated 2m here. WSJ/CNA.
Sep 16, 2008

Wall Street Journal
New York - American International Group Inc. is facing a severe cash crunch as ratings agencies cut the firm's credit ratings yesterday, forcing the giant insurer to raise US$14.5b to cover its obligations.

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.

(Littlespeck update: Since this posting, the US Federal Reserve has announced an US$85bn rescue package, in return for an 80% public stake in AIG.)

The company, whose stock fell 61% in New York yesterday, is such a big player in insuring risk for institutions around the world that its failure could shake the global financial system.

AIG has been scrambling to raise as much as US$75b to weather the crisis, and people close to the situation said that if the insurer doesn't secure fresh funding by Wednesday, it may have no choice but to opt for a bankruptcy-court filing.

"The situation is dire," a person close to AIG said. (Wall Street Journal)

The fear hits Singapore

In Singapore, Channel News Asia reported that some people, worried that AIG could be the next financial giant to fall after Lehman Brothers, today formed a queue at AIA's customer service centre at Raffles Place.

Some long term AIA policy holders told CNA that they wanted to surrender their policies, even though there was a penalty for that.

Some have waited for up to three hours to be attended by staff who have been overwhelmed by requests since the office opened this morning, the TV station added. Others said they have turned up at the AIA office to find out more. AIA Singapore has yet to comment.

It has five buildings at Robinson Road, Alexandra, Changi, Tampines and Tanjong Pagar, and has over 2m policies in force.

CNA quoted Singapore's Monetary Authority (MAS) as saying that AIA Singapore, as a registered insurer, is required to maintain sufficient financial resources to meet all its liabilities to policy-holders at all times. It added that AIA Singapore currently meets these regulatory requirements. (CNA)

In Washington, Wall Street Journal said many market participants had been anticipating a government-led rescue. So far, however, the US has been reluctant to step in, preferring instead to broker a private-sector solution.

The Federal Reserve hosted a meeting to discuss AIG's prospects at the central bank's offices in New York on Monday with company executives, bankers as well as state and federal officials.

With strong encouragement from the Fed, Goldman Sachs and J.P. Morgan Chase are seeking to raise US$70b-75b 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.

The company turned to the government in earnest after a weekend where intense efforts failed to produce a plan to raise roughly US$40b in capital.

The worsening crisis has now forced the firm to seek considerably more, underscoring its precarious position. AIG needs the money to sidestep a potentially fatal downgrade by credit-rating firms.

One sliver of optimism for AIG last night was that much of its exposure is related to credit default swaps, insurance contracts tied to corporate defaults. AIG's counterparties on these instruments include many Wall Street firms, which may have an incentive not to demand more collateral so as not to trigger a wider panic.

Such collateral could come in the form of cash or a liquid asset such as a municipal bond.

But many of AIG's counterparties are based in Europe and Asia and may have less interest in helping to prop up the firm...

.. 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.

But each day lost can make it harder to craft a solution. Nervous investors continued to hammer its stock. AIG's share price closed at $4.76 in 4 pm yesterday 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.

http://online.wsj.com/article/SB122148503202636197.html?mod=special_coverage