AIG faces failure as firestorm burns markets

AIG faces failure as firestorm burns markets

NEW YORK - US insurance giant American International Group raced against the clock to avert collapse on Tuesday after three blows to its credit standing, and central banks pumped out US$160 billion to prop up financial markets.

AIG was at risk of following Lehman Brothers into bankruptcy despite approval for it to borrow US$20 billion and as report said the Federal Reserve had asked two banks to help provide US$70-75 billion.

Markets, investors and savers around the world focused on AIG to see if it would be the next failure in the firestorm from the shocks on Wall Street on Monday, when another investment bank Merrill Lynch was bought out of trouble by Bank of America.

Economist Jeffrey Sachs of Columbia University warned: 'There is more ahead. The US economy is definitely going into recession ... There's more financial turmoil ahead.'

Stock markets fell for a second day on widespread recognition that the financial crisis is the worst since the crash of 1929. The fall in Europe was smaller than on Monday but Asia markets plunged and bank shares everywhere were showing big losses.

AIG was in the eye of the storm as the European Central Bank, and British and Japanese central banks injected US$160 billion so that banks, reluctant to lend to each other, have funds.

The US Treasury, as it had done for Lehman, ruled out using taxpayer money to prop up AIG.

The Wall Street Journal, citing people familiar with the situation, reported that on Monday the US Federal Reserve asked Goldman Sachs Group and JP Morgan Chase to help make US$70-75 billion in loans available to AIG.

New York state has thrown the only lifeline of sorts to AIG, announcing Monday that the company can, in effect, loan itself US$20 billion, by borrowing against its assets.

But even that failed to reassure credit rating agencies. In blow after blow late Monday, the three main agencies - Standard & Poor's, Moody's and Fitch - lowered AIG's credit score.

Bottom line: they judge the solvency of AIG, the largest US insurer, with a global reach, at risk.

As a consequence, AIG will need to raise huge amounts in new capital to survive, although it already has sought billions of dollars to keep it going.

The Wall Street Journal reported on Tuesday that people close to the situation say AIG may be forced into filing for bankruptcy if it cannot raise the money by Wednesday.

'The situation is dire,' an anonymous source close to AIG told the Journal.

The three ratings agencies gave essentially the same reasons for the downgrade: the US housing crisis, to which AIG is highly exposed, and its share freefall.

In pre-market trading AIG shares were down $1.97, or 41.4 per cent at US$2.79. On Monday AIG shares plummeted 61 per cent to US$4.76; they have lost 93 per cent of their value in a year.

'The rating actions reflect Fitch's view that AIG's financial flexibility and ability to raise holding company cash is extremely limited,' Fitch said in a statement.

Standard & Poor's Ratings Services lowered its long-term counterparty rating to 'A-' from 'AA-' and its short-term counterparty credit rating on AIG to 'A-2' from 'A-1+' according to a statement. Moody's downgraded AIG to 'A2' from 'AA3' and Fitch lowered its rating to 'A' from 'AA.' Far more than other insurers, AIG has been a big player in a complex parallel market called credit default swaps (CDS), financial instruments in which Wall Street companies take out a form of market insurance against the risks of bond default.

These products, often linked to the US real-estate market, are at the heart of the current banking crisis and have led to massive write-downs of assets around the world.

AIG alone has written down US$25 billion amid spiking defaults on US mortgage payments in the United States.

In a filing with US market regulator, the Securities and Exchange Commission, AIG said it would need US$13.3 billion to meet its CDS obligations, if S&P and Moody's lowered its rating a notch.

Moody's, in a dire warning, said that 'further downgrades of the parent and certain operating units are likely if the immediate liquidity and capital concerns are not fully addressed. Such downgrades could amount to multiple notches.' The stakes are high for a company that until only recently had been long considered the world's largest insurer. In the past year it has been battered by the global credit crunch and the worst US housing slump in decades.

AIG has 74 million customers worldwide, most of them American, who would find themselves without insurance if the company goes bankrupt. It employed 116,000 people in 130 countries at the end of 2007.

According to US media reports, among the assets AIG is hoping to sell is its aircraft leasing business, International Lease Finance Corporation, which has a fleet of 1,000 planes. --