Sept. 15 (Bloomberg) -- American International Group Inc., the largest U.S. insurer by assets, fell by almost half in New York trading as the company failed to present a plan to raise capital and stave off credit downgrades.
AIG, seeking to raise $20 billion in capital and sell $20 billion of assets, rejected investments from buyout firms KKR & Co., TPG Inc. and J.C. Flowers & Co., people familiar with the talks said. AIG instead sought $40 billion from the Federal Reserve, the New York Times reported, citing an unnamed person. Warren Buffett is said to be in talks with AIG as well, Insurance Insider reported today citing unidentified people.
``People are afraid of what they are not hearing from the company,'' Robert Bolton, managing director at Mendon Capital Advisors Corp., said today in a Bloomberg Television interview. ``The only thing people have to trade on right now are the rumors, and they are coming up with their own conclusions.''
Chief Executive Officer Robert Willumstad is under pressure to raise capital after three quarterly losses totaling $18.5 billion and Lehman Brothers Holdings Inc.'s collapse after failing to secure a lifeline. Investors had expected details on Willumstad's turnaround plan this morning.
AIG fell $5.78, or 48 percent, to $6.36 at 11:18 a.m. in New York Stock Exchange composite trading, extending last week's 46 percent plunge.
`Worst Quarter Yet'
AIG may report writedowns of $30 billion resulting in its ``worst quarter yet'' if Lehman's bankruptcy leads to distressed sales of mortgage assets, providing lower market values for AIG's holdings, Citigroup Inc. analyst Joshua Shanker said today in a note. He downgraded AIG to ``hold'' from ``buy.''
Standard & Poor's said Sept. 12 it may downgrade AIG's credit ratings because the share declines may crimp the insurer's access to capital. The company declined 79 percent this year before today, making it the worst performer in the Dow Jones Industrial Average.
Kenneth Lewis, the CEO of Bank of America Corp. who passed on a chance to acquire Lehman, said in a conference call today that AIG would be a ``much bigger problem'' than the securities firm.
The company got into trouble when it expanded into areas such as credit-default swaps, which are contracts AIG sold to protect debt investors, with ``narrow margins for what has now turned out to be a much greater amount of risk than anybody anticipated,'' Willumstad, 63, said Aug. 7.
Lost Credibility
AIG's efforts to raise capital shows how badly losses from U.S. mortgages hurt the insurer. As recently as February, AIG managers had touted a cushion of $14.5 billion to $19.5 billion in excess capital. The capital was going to be used to make acquisitions, sell new products and repurchase shares, AIG has said.
The insurer lost credibility under former CEO Martin Sullivan, whose three-year tenure ended in June. Sullivan reassured investors that costs related to the U.S. housing slump were ``manageable'' before posting record losses.
Investors are concerned the New York-based insurer can't raise enough cash to withstand further writedowns from credit- default swaps,
A ratings cut may have ``a material adverse effect on AIG's liquidity'' and trigger more than $13 billion in collateral calls from debt investors who bought the swaps, the insurer said in an Aug. 6 filing. AIG has already posted $16.5 billion in collateral through July 31. A downgrade could also set off early termination of swaps that may cause $4.6 billion in payments, AIG said.
Federal Reserve
``It seems more and more likely that AIG may go to the Federal Reserve window to borrow cash at the discount rate, should the Fed allow it,'' Shanker said.
AIG spokesman Nicholas Ashooh didn't return calls seeking comment and the Fed's Michelle Smith declined to comment.
The Federal Reserve yesterday widened the collateral it accepts for loans to Wall Street bond dealers as the financial industry braced for a Lehman bankruptcy filing. The 158-year-old securities firm filed a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today.
``The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets,'' Fed Chairman Ben S. Bernanke said in a statement released in Washington yesterday.
The buyout firms met with AIG executives in New York, said people familiar with the situation, who declined to be named because the talks were private. AIG is said to be working with advisers JPMorgan Chase & Co., Citigroup and Blackstone Group LP.
Warren Buffett
J.C. Flowers had offered $8 billion for a stake in the insurer that would have given the firm an option to buy the rest of AIG, the Times said.
Berkshire Hathaway Inc.'s Buffett ``is thought to be in talks'' with AIG about a possible investment, the Insurance Insider reported today, citing unidentified sources. A Berkshire spokeswoman didn't return a message seeking comment.
``Unfortunately AIG will have to likely cut into bone and sell good assets that are earning good returns to support the collateral needs of bad assets,'' said John Hall, analyst at Wachovia Corp., today in a note.
American General Finance, AIG's consumer lender, could fetch more than $6 billion if the unit sold for twice its book value. AIG Investments could sell for more than $3 billion if it sold for 2.5 percent of clients' assets under management. The company's stake in reinsurer Transatlantic Holdings Inc. is worth about $2.2 billion, based on the Sept. 12 share price.
Aircraft Leasing
Bank of America analyst Alain Karaoglan said Willumstad, 63, should reconsider the decision to keep its aircraft-leasing unit, International Lease Finance Corp. which could sell for $7 billion to $14 billion.
The insurer raised $20.3 billion in May by selling debt and equity, diluting the holdings of long-time investors. It's ``very hard to predict'' if AIG will need more capital, Willumstad said Aug. 7.
New York Governor David Paterson and Insurance Superintendent Eric Dinallo have been ``very, very closely involved,'' in AIG's planning, said David Neustadt, a spokesman for Dinallo, in an interview yesterday. ``We've spent the last two days at AIG headquarters.''
Paterson was scheduled to make a statement on AIG at 12 p.m. New York time today.
AIG's former CEO and Chairman Maurice ``Hank'' Greenberg, who controls the largest stake in the insurer, wasn't involved in the company's planning yesterday or Sept. 13 and has ``repeatedly offered'' to assist the firm, said spokesman Glen Rochkind.
Hank Greenberg
Greenberg, 83, saw the holdings decline by $3.1 billion last week. He controls 11 percent of AIG shares through two investment firms and personal holdings.
Credit-default swap sellers demanded 34 percentage points upfront and 5 percentage points a year to protect AIG bonds from default for five years, according to CMA Datavision. That compares with an upfront cost of 12.5 percentage points on Sept. 12 and means it would cost $3.4 million initially and $500,000 a year to protect $10 million in bonds for five years.
To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net
Last Updated: September 15, 2008 11:45 EDT
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