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 going to the Federal Reserve for help, people familiar with the situation said.
The measures are aimed at staving off a downgrade by major credit-rating firms. AIG executives worried that such an action would set off a chain reaction that could be fatal to the firm. The insurer, which has already raised $20 billion in fresh capital so far this year, was seeking to raise an additional $40 billion to avoid a downgrade.
During a weekend scramble to shore up its finances, AIG turned down a capital infusion from a group of private-equity firms led by J.C. Flowers & Co. because an option tied to the offer would have effectively given them control of the company, an 89-year-old giant that does business in nearly every corner of the world.
The proposed option would have allowed the firms to acquire AIG for $8 billion under certain conditions. That price is just one-fourth of AIG's current market value.
J.C. Flowers didn't respond to messages seeking comment.
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. Mr. Willumstad asked New York Federal Reserve President Timothy Geithner if the Fed could backstop some asset sales.
Two other private-equity firms -- Kohlberg Kravis Roberts & Co. and TPG -- offered to inject capital into AIG if the Fed agreed to provide the insurer with a bridge loan until its restructuring plan was completed.
AIG viewed the request to the Fed not as a bailout but rather as a temporary measure that would give the insurer some breathing room until it was able to dispose of the assets.
As of late Sunday, the Fed had yet to decide whether to offer the assistance. The Fed usually deals with banks and brokers, and it wasn't clear what it could do. Mr. Geithner didn't respond to a request for comment and a company spokesman had no comment.
Here is the one-year stock price chart for American International Group:
I find it rather ironic that AIG is calling their federal bailout as a "temporary measure." The New York Times is reporting that ratings agencies are threatening to downgrade AIG's credit rating on Monday morning. One AIG employee said that "if such an event occurred, A.I.G. may survive for only 48 hours to 72 hours." AIG reported a $5 billion quarterly loss in August, mainly because of the subprime mortgage mess. AIG's 2008 first quarter loss was $7.7 billion, with "net losses exceeding $18 billion over the past three quarters." AIG is also drowning in subprime mortgage debt that is creating huge losses for the company. And AIG is selling everything to cover its losses. According to the Wall Street Journal story:
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 considered shifting assets from its regulated insurance business to its holding company, which would help the holding company respond to demands for cash or collateral. But that plan was met with resistance from regulators and by late Sunday it appeared unlikely it would come together.
[....]
Earlier this year, AIG considered selling or spinning off ILFC, the aircraft-leasing arm, but it decided against the idea in June. Since then, AIG's position has deteriorated, making it more likely that it would try again to unload the unit.
AIG could also raise cash by selling its investments in Blackstone Group LP, which is also helping to advise the insurer on its restructuring. AIG owns a stake in Blackstone worth about $700 million. It also has roughly $1 billion in investments in Blackstone's funds, according to regulatory filings, that it could sell in the secondary market.
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 private-equity firms would take in an AIG investment, and whether they have enough capital to make a dent in AIG's problems.
"The numbers are too daunting," said a senior executive at a large private-equity firm. Given AIG's huge balance sheet, "we just don't have enough capital to fill the hole."
This is just a huge mess that I'm not sure I can even comprehend. There are just so much losses on AIG's balance sheet, and not enough assets to cover those losses. It is no wonder that AIG is the next Wall Street investment firm to show up on the Fed's door, hat in hand. The American taxpayer has already bailed out Bear Sterns, JP Morgan, Fannie Mae and Freddie Mac. The Fed rejected bailing out Lehman Brothers. And now AIG is asking for a federal bailout.
Are we looking at the collapse of Wall Street?
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