Major credit ratings agencies downgraded the American International Group late Monday, worsening its financial health, as Federal Reserve officials and two leading investment banks were in urgent talks to put together a $75 billion line of credit to stave off a crisis at the company, The New York Times’s Mary Williams Walsh and Michael J. de la Merced reported.
The credit downgrades are likely to force the company to turn over billions of dollars in collateral to its derivatives trading partners.
Without the financing, which was being arranged by Goldman Sachs and JPMorgan Chase in talks with the Federal Reserve officials, A.I.G. might be forced to declare bankruptcy, according to The Times.
The talks, which began last week and continued through the weekend, added to the sense of agitation in the stock market on Monday, as investors grappled with the implications of the bankruptcy ofLehman Brothers, which, like A.I.G., was a large counterparty to derivatives contracts held by countless financial institutions.
Shares in A.I.G. tumbled more than 60 percent on Monday morning as concerns grew that the firm lacked capital to withstand cuts to its debt rating, which were borne out later in the day. The company’s potential write-offs are mounting and may reach $60 billion to $70 billion, according to The Times.
Most of A.I.G.’s businesses are healthy, but its troubles grew from one unit that dealt in complex debt securities and derivatives and now threatens to drain cash more quickly than the financing package can be assembled.
The day started off with news that A.I.G. had requested a $40 billion bridge loan from the Fed, a request that was rebuffed, and ended with the word that its need had soared to $75 billion. The firm suffered several credit-rating downgrades Monday evening, including cuts by Standard & Poor’s and Moody’s.
The complex discussions, continuing into the night as a deal was sought before United States markets open on Tuesday, involved New York state regulators, federal regulators, private equity firms and Wall Street banks that rely on A.I.G.’s ability to honor its derivatives contracts, as they do with Lehman Brothers.
“It’s not just the failure of one company,” Julie A. Grandstaff, vice president and managing director of StanCorp Investment Advisers, told The Times. “It’s the ripple effect of the disappearance of counterparties” that was spurring urgent efforts to bolster A.I.G.
A large counterparty to derivatives contracts has not declared bankruptcy since the market grew to such enormous size, so Lehman will be a test. Financial officials fear another failure of a big counterparty could start a chain reaction.
The need to find fresh money for A.I.G. is bringing new layers of complexity to the credit crisis. As an insurance concern, A.I.G. has wholly different regulators and capital requirements than the banks and Wall Street firms that have suffered most of the huge losses so far. One person briefed on the matter told The Times that potential lenders doubted that the facility could come together without the Fed’s backing.
A.I.G. itself has had three chief executives in the last three and a half years, and one person briefed on Monday’s discussions told The Times that its officials seemed uncertain about how to proceed. The Fed was not able to provide the $40 billion bridge loan because it oversees banks, not insurers.
The talks about backing up A.I.G. began last week, when the company approached regulators, saying it was concerned that if a deal could not be put together to save Lehman, A.I.G.’s own future would be in doubt. A.I.G., through its financial products unit in London, has exposure to the same mortgage-linked debt securities that brought about the downfall of Lehman.
The talks between A.I.G. and its regulators led to the announcement at midday by Gov. David A. Paterson of New York that the state would allow A.I.G. to borrow $20 billion from its own subsidiaries, to help bolster its capital in the face of potentially disastrous credit downgrades.
Mr. Paterson said he had authorized the state insurance superintendent, Eric R. Dinallo, to include the $20 billion asset transfer in the broader plan being worked out at the New York Fed.
Normally state insurance regulations would prevent a holding company like A.I.G. from pulling assets out of its subsidiaries, which are insurance companies that need sufficient liquid resources to pay their claims.
But Mr. Paterson said the situation was dire.
“I hope you’re aware of the risks if we don’t act,” he told journalists at a midday news conference. “It is a systemic problem.”
People briefed on the matter told The Times that if JPMorgan and Goldman Sachs were able to raise a $75 billion credit line by Tuesday, it could avert an escalating series of collateral calls. But it was unclear whether they could put together such a complicated package in time.
A.I.G. has also considered sales of virtually all of its business assets, but conducting such sales quickly would be hard.
During the weekend, A.I.G. had been negotiating for a capital infusion from three private equity firms, The Times said. But A.I.G. rejected an offer from J.C. Flowers & Company to buy $8 billion in preferred shares, because the bid included an option to buy the rest of the company at a steep discount.
Two other buyout firms, Kohlberg Kravis Roberts and the Texas Pacific Group, withdrew their offers to buy preferred shares as the Fed made clear that it would not provide any sort of backstop.
But Maurice R. Greenberg, the visionary leader who built A.I.G. but was removed during an accounting scandal in 2005, has offered to help with any restructuring. Mr. Greenberg and his lawyers asked on Saturday if he could play a role in overhauling A.I.G. The deadpan response, according to a person close to the company, was: If you are willing to make a multimillion-dollar equity investment, we are happy to talk.
Mr. Greenberg has seen the value of his holdings plummet as A.I.G. shares have sunk. He holds about 39 million A.I.G. shares directly and an additional 243 million through his private equity firm, Starr International. The shares were worth about $15.8 billion at the beginning of this year, but just $1.3 billion as of Monday.
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