This is truly unbelievable. Even as little as a week ago, the idea that AIG, the world’s biggest insurer, would go begging the Fed for help would have seemed daft. But that’s now an element of the meltdown in progress.
And AIG is a major credit default swaps writer, bigger than Bear. If Bear could not be allowed to fail, AIG certainly can’t come apart. But how can the Fed extend a lifeline to a party it doesn’t regulate, or even have as a counterparty? The Primary Dealer Credit Facility was a clever move, but was not in place soon enough to save Bear. This is even more of a stretch, and on an even more pressured timetable.
From the Wall Street Journal:
Insurer American International Group Inc., succumbing to relentless investor pressure that drove its shares down 31% on Friday alone, is pulling together a survival plan that includes selling off some of its most valuable assets, raising more capital and possibly going to the Federal Reserve for help….
During a weekend scramble to shore up its finances, AIG turned down a capital infusion from a group of private-equity firms because it would have effectively given them control of the company…..
Yves here, That is not going to endear them to the Fed, turning down a deal, particularly when Merrill did the right thing and sold itself to avert a possible systemic event. This is brassy and risks overplaying their hand. If I were the powers that be, I’d tell them to stuff it and take the deal.
When AIG’s board rejected the capital infusion, the company’s recently appointed chairman and chief executive, Robert Willumstad, took the extraordinary step of reaching out to the Federal Reserve for help. The Fed usually deals with banks and brokers, and it wasn’t clear what it could do…
The assets AIG intends to sell include its domestic automotive business and its annuities unit, according to people familiar with the matter. It also looked into selling its aircraft-leasing arm, International Lease Finance Corp., but it isn’t clear whether action on ILFC will be part of the emergency steps.AIG also may shift assets from its regulated insurance business to its holding company, which would help the holding company respond to demands for cash or collateral…..
The rush for cash represents a remarkable comedown for AIG, whose role in global finance is in many ways as critical as investment banks such as Lehman Brothers….
Eric Dinallo, the insurance superintendent in AIG’s home state of New York, took a significant role in the talks over the weekend, according to a person familiar with the matter. One key issue, the person said, was the proposed shift of assets. Insurers typically face stringent regulations on how they use their assets, as regulators seek to make sure that they can meet their obligations to policyholders…..
Among its challenges: It doesn’t have access to the Fed’s lending window, as some other troubled financial firms do. It could face significant claims from Hurricane Ike, which battered the Texas coast over the weekend. It had to pay a stiff premium in August when it borrowed money in the corporate bond market…..
private-equity firms would take in an AIG investment, and whether they have enough capital to make a dent in AIG’s problems
It’s not clear whether AIG has buyers lined up for any of the assets it wants to sell. Also unclear is how much interest.
For more detail on the proposed asset sales, see here and here.
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even with the mer deal with bac, i think tomorrow is going to be bad…lot’s of “getting out” of positions. what might be a side story, but almost as important, will be the continued decimation of commodities. i personally think gold heads back down and crude drops $5 or more, kinda like what bac’s stock will do.
So what’s going to happen to my auto insurance?
buy bullion and put it away….soon.
If the Fed extends their lending facility to AIG, they might as well extend it to General Motors next. They’d be on about the same legal footing.
The last time I heard all of these names together there was a spitzer and a hooker in the middle of the room.
JC flowers supposedly pulled their stake bid according to NYT (via cnbc)…wow, they are professional walkers.
Don’t ask questions, don’t stand in the way or you will be labeled a combatant.
Precious metals respond to the US dollar in the inverse.
of course the fed will assist AIG. they are one of the largest swaps counterparties in the world.
who do you think is on the other side of fannie & freddie's interest rate hedges?
this is something to behold. paulson & bernanke are such idiots. all they had to do was offer forbearance to the banking system (inc GSE's) and equity capital would have rushed into the system.
instead, they started giving speeches about the need for the financial system to recapitalize itself. as if the owners of the banks were supposed to dilute themselves for the greater good of society instead of shrinking their balance sheet.
if you want banks to lend in a credit crunch, you give them leniency around minimum capital regulations. period. you don't go around giving speeches telegraphing equity raises that have the impact of driving down their stock prices, thereby giving them less incentive to raise equity.
i knew this thing would take an ugly turn for the worst when the lawyers called about the KEY and FITB deals. those companies had strong Tier 1 capital ratios and minimal mortgage exposure. there was no reason for them to be raising capital, except for the fact that the Fed & Treasury dept decided it wanted everyone to increase minimum capital ratios by 200bps.
sheer lunacy. paulson's efforts to 'save' the system are making things worse. it's just like the fed raising rates in 1930 in an attempt to stop the outflow of gold out of the US.
Willumstad is confused and thinks that he still works for a bank.
J. C. Flowers, meanwhile, is a very valuable contrary indicator. They haven’t been too good at calling bottoms recently…
“That is not going to endear them to the Fed, turning down a deal, particularly when Merrill did the right thing and sold itself to avert a possible systemic event. This is brassy and risks overplaying their hand. If I were the powers that be, I’d tell them to stuff it and take the deal.”
I agree 110%. Unbelievable.
Yves, I agree with your general tone here.
After the Hank Greenberg FIASCO that played out over the past year, AIG is in no position to be anything OTHER than a tearful supplicant to the Fed.
And such tearful supplication DOES NOT mean that the Fed desires their HIGHLY radioactive toxic waste dumped into the pond that is the asset pool of the Fed. Remember Rogoff’s warning. And Rogoff is mainstream Fed buddy buddy.
On the other hand, they are a HUGE market CDS market maker and their situation has ENORMOUS implications for the future of the CDS plumbing.
The continued hubris of AIG is asinine.
Matt Dubuque
bondinvestor:
"of course the fed will assist AIG. they are one of the largest swaps counterparties in the world.
who do you think is on the other side of fannie & freddie's interest rate hedges?"
Are you saying that AIG is yet another one "too big to fail"?
What would happen if the Fed would tell AIG to stuff it, get bought or die?