AIG secures £20 billion bridge loan, but still downgraded

Struggling US insurance giant American International Group (AIG) was granted permission yesterday to access assets from its own subsidiaries, enabling it to raise around $20 billion in additional capital.

The Federal Reserve Bank of New York hosted a meeting yesterday to discuss the future of the company, at the request of AIG. Those attending included a consortium of financial institutions, the New York State Insurance Department and the US Treasury Department. Also present were the president of the New York Fed, Timothy Geithner, and superintendent of the New York State Insurance Department, Eric Dinallo.

New York State governor David Paterson yesterday gave approval for the insurer to transfer the assets, a plan that did not involve any state money. The New York State Insurance Department will continue to closely monitor AIG to ensure it has the assets to pay claims, Paterson said.

“Wall Street’s continuing problems should serve as a stark reminder that this recession is far from over. New York State has taken the first step towards helping to stabilise AIG, which is otherwise a very healthy company,” he added.

At the meeting, the New York Fed asked Goldman Sachs to work with AIG and JP Morgan (which is the financial adviser to AIG) to come up with possible solutions to the insurer’s problems. One of the options explored was to organise a loan of private money of up to $75 billion to help the company through the turmoil.

AIG has reported $18.5 billion in losses over the past three quarters and has faced massive writedowns on its structured mortgage portfolio. In the first three months of 2008, AIG Financial Products (a wholly owned subsidiary of AIG) recorded $9.11 billion of writedowns on its super-senior credit default swap (CDS) portfolio.

The $20 billion in additional capital did not stop AIG from being downgraded by the major rating agencies.

Yesterday, Moody’s Investors Service downgraded the company to A2 from Aa3, Fitch cut its rating to A from AA-, while Standard & Poor’s (S&P) downgraded the company to A- from AA-. Moody’s and S&P warned they might further reduce AIG’s ratings by multiple notches if it does not address its liquidity and capital concerns.

Fitch’s rating action report drew attention to the fact that, as of July 31, AIG estimated it could be required to post $10.5 billion of additional collateral if the company's ratings were downgraded one notch from current levels by the other major rating agencies and $13.3 billion of collateral if downgraded by both of the other agencies.

“Fitch believes AIG is likely to pursue other steps to raise cash and capital and that the company might pursue the sale of various operating units,” said the report.

Fears over AIG’s capital levels and its ability to remain a functioning business have sent spreads on its credit default swaps ballooning in recent weeks. Spreads on its five-year CDS rose to 1908.5 basis points on September 15 from 373.3bp at the start of the month. On May 1, it was trading at 87.5bp.

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