AIG Loss Sparks Talk of New Rescue
WSJ
By LIAM PLEVEN, SERENA NG and MATTHEW KARNITSCHNIG
American International Group Inc. is preparing to report a quarterly loss that will likely top $60 billion, according to people familiar with the matter, a mammoth hole that could force the government to expand a bailout package that's already at $150 billion.
Investment losses and a series of wayward bets on derivatives and securities-lending plans have pushed AIG's expected losses for 2008 over $100 billion, a sum nearly 100 times the insurer's current market value.
The losses have set off another crisis for both the newly installed Obama administration and the Federal Reserve. Letting AIG fall into deeper distress could set off an unpredictable chain of events, creating problems for dozens of banks and financial institutions around the world that still rely on AIG to insure them against losses on large bundles of loans and other debt.
So far, government officials have been reluctant to recut the AIG deal, in part because of the risk that would pose to the government's own balance sheet. Yet the risks to the financial system are large enough to compel federal officials to act. Potential approaches include backstopping AIG's soured assets, converting some of the government's debt into equity, and handing over ownership of AIG business units directly to the government to help pay back loans.
The government's stake already stands at about 79.9%. Going above that threshold would compel the government to consolidate AIG's roughly $1 trillion balance sheet on its own books. That would further strain the government's creditworthiness even as it is trying to stanch crises across the banking system and the broader economy. It could also prove politically unpalatable: In the public mind, AIG is already a symbol of Wall Street greed.
Nonetheless, new rescue moves are being weighed in part because a new credit-rating downgrade would force AIG to come up with billions of dollars to counterparties. It was just such a downgrade in September that nearly pushed AIG into bankruptcy and triggered the initial rescue.
The government's initial $85 billion loan was conceived as a short-term bridge that would let AIG sell off assets and reorganize as a smaller firm. But AIG has found it difficult to sell assets in this economy.
The rescue package has already been increased twice since September, from $85 billion to nearly $123 billion in October and then to $150 billion in November.
The latest changes under consideration could require the government to increase its exposure to potential losses even if it doesn't actually put up any more dollars right away.
For instance, if the government provided backing to some of AIG's assets, it could be on the hook for more losses. As of Sept. 30, AIG was exposed to commercial mortgage-backed securities originally worth roughly $23 billion, but that sector has been hit hard during the downturn.
Potential Solutions
One possible solution to AIG's immediate cash needs would be for the government to allow the insurer to repay the $40 billion already drawn down on the initial $60 billion government credit line. Instead of repaying that money in cash, as originally planned, AIG would sign over certain of its assets to the government.
The assets, which would include some of AIG's Asian holdings, would likely be spun off and taken public with the government owning major stake, according to people familiar with the discussions. AIG's debt to the government would be reduced by an equal amount. That would allow AIG to borrow more money, though it doesn't currently plan to do so, according to a person close the insurer.
The discussions between AIG and the government are fluid, and it's not clear exactly what set of tools the sides will settle on to try to address AIG's issues. For instance, asset backstops might be another imperfect solution. Such backstops have been used in other cases -- Citigroup Inc. and Bank of America Corp. -- and the share prices of both companies have kept falling.
Similarly, the government is considering an accounting step that would allow it to increase support for AIG without technically giving it more cash. The U.S. would have AIG turn over ownership of AIG business units; that would reduce the amount of money AIG owes the government, making it possible for the U.S. to top up the existing AIG lending facility with fresh cash.
One major sticking point is how to value the assets, especially because prices are in rapid decline. Similarly, the government could end up the outright owner of certain businesses, which presents myriad issues, both operational and regulatory.
Inside the Fed, officials have been worried about AIG's fourth-quarter loss and about the risk that the insurance giant will have its credit rating downgraded.
AIG's share price has fallen nearly 59% since the end of January and ended trading Monday at just 53 cents a share.
That AIG would be reporting large investment losses in the fourth quarter is not, in and of itself, a huge surprise given the turmoil in the financial markets late last year and the breadth of the company's portfolio.
In a statement Monday, the company said it is continuing to work with the government "to evaluate potential new alternatives for addressing AIG's financial challenges." The company has a week to report fourth-quarter and full 2008 earnings.
"We will provide a complete update when we report financial results in the near future," AIG said.
Mortgage Write-Downs
AIG's results are expected to include large write-downs of its exposures to commercial mortgage debt, which suffered record price declines during the fourth quarter of last year. Delinquencies among real-estate loans, which help finance office buildings, shopping centers and other properties, are also on the rise, a factor that is weighing on their values.
A Merrill Lynch index of triple-A commercial real estate securities indicates prices declined around 13% in the fourth quarter and currently trade at around 75% of their original values. Similar securities with lower ratings fared much worse -- some declining 50% or more during the quarter.
Even though the Federal Reserve helped AIG unwind some of its troubled swap positions last November by purchasing the underlying securities, AIG continued to incur collateral calls and further write-downs on swaps tied to certain mortgage-related positions that couldn't be unwound easily. Most of the troubled collateralized debt obligations were backed mainly by subprime-mortgage collateral, and their prices also slumped further during the fourth quarter.
Threat of Further Calls
The threat of further collateral calls is one major reason why a downgrade in AIG's credit ratings could pose an immediate threat to its liquidity.
Standard & Poor's has an A-minus long-term rating on AIG, and Moody's Investors Service has an equivalent rating of A3. Both credit-rating firms said Oct. 3 they were reviewing the ratings for downgrades. Such reviews typically take around 90 days, but have been known to go longer.
Rating downgrades from current levels could be devastating to AIG's finances and would trigger billions of dollars more in payments to its policyholders, trading partners and customers.
A one-notch rating cut would push AIG's long-term ratings down to BBB-plus at S&P and Baa1 at Moody's. A downgrade would also likely cause AIG's short-term debt ratings to fall below their current level of A-1, which is the minimum rating threshold for borrowings under the Federal Reserve's Commercial Paper Funding Facility.
Since that facility went live in late October, AIG and its units have been tapping it to the tune of around $15 billion. A loss of access to these rolling three-month loans -- which have very low interest rates -- may force the company to draw down more of its credit line from the Fed and incur significantly more in interest costs.
In a November filing with the Securities and Exchange Commission, AIG warned a one-notch downgrade of its long-term rating could cause it to have to pay out around $8 billion to its counterparties, including collateral and "termination payments" on contracts it has written.
The impact of a two-notch downgrade from current levels could be much bigger, giving counterparties the right to terminate transactions that cover nearly $48 billion in debt. AIG has posted collateral against some of those positions, so its actual cash outflow in such a situation would likely be less than that amount.
WSJ
By LIAM PLEVEN, SERENA NG and MATTHEW KARNITSCHNIG
American International Group Inc. is preparing to report a quarterly loss that will likely top $60 billion, according to people familiar with the matter, a mammoth hole that could force the government to expand a bailout package that's already at $150 billion.
Investment losses and a series of wayward bets on derivatives and securities-lending plans have pushed AIG's expected losses for 2008 over $100 billion, a sum nearly 100 times the insurer's current market value.
The losses have set off another crisis for both the newly installed Obama administration and the Federal Reserve. Letting AIG fall into deeper distress could set off an unpredictable chain of events, creating problems for dozens of banks and financial institutions around the world that still rely on AIG to insure them against losses on large bundles of loans and other debt.
So far, government officials have been reluctant to recut the AIG deal, in part because of the risk that would pose to the government's own balance sheet. Yet the risks to the financial system are large enough to compel federal officials to act. Potential approaches include backstopping AIG's soured assets, converting some of the government's debt into equity, and handing over ownership of AIG business units directly to the government to help pay back loans.
The government's stake already stands at about 79.9%. Going above that threshold would compel the government to consolidate AIG's roughly $1 trillion balance sheet on its own books. That would further strain the government's creditworthiness even as it is trying to stanch crises across the banking system and the broader economy. It could also prove politically unpalatable: In the public mind, AIG is already a symbol of Wall Street greed.
Nonetheless, new rescue moves are being weighed in part because a new credit-rating downgrade would force AIG to come up with billions of dollars to counterparties. It was just such a downgrade in September that nearly pushed AIG into bankruptcy and triggered the initial rescue.
The government's initial $85 billion loan was conceived as a short-term bridge that would let AIG sell off assets and reorganize as a smaller firm. But AIG has found it difficult to sell assets in this economy.
The rescue package has already been increased twice since September, from $85 billion to nearly $123 billion in October and then to $150 billion in November.
The latest changes under consideration could require the government to increase its exposure to potential losses even if it doesn't actually put up any more dollars right away.
For instance, if the government provided backing to some of AIG's assets, it could be on the hook for more losses. As of Sept. 30, AIG was exposed to commercial mortgage-backed securities originally worth roughly $23 billion, but that sector has been hit hard during the downturn.
Potential Solutions
One possible solution to AIG's immediate cash needs would be for the government to allow the insurer to repay the $40 billion already drawn down on the initial $60 billion government credit line. Instead of repaying that money in cash, as originally planned, AIG would sign over certain of its assets to the government.
The assets, which would include some of AIG's Asian holdings, would likely be spun off and taken public with the government owning major stake, according to people familiar with the discussions. AIG's debt to the government would be reduced by an equal amount. That would allow AIG to borrow more money, though it doesn't currently plan to do so, according to a person close the insurer.
The discussions between AIG and the government are fluid, and it's not clear exactly what set of tools the sides will settle on to try to address AIG's issues. For instance, asset backstops might be another imperfect solution. Such backstops have been used in other cases -- Citigroup Inc. and Bank of America Corp. -- and the share prices of both companies have kept falling.
Similarly, the government is considering an accounting step that would allow it to increase support for AIG without technically giving it more cash. The U.S. would have AIG turn over ownership of AIG business units; that would reduce the amount of money AIG owes the government, making it possible for the U.S. to top up the existing AIG lending facility with fresh cash.
One major sticking point is how to value the assets, especially because prices are in rapid decline. Similarly, the government could end up the outright owner of certain businesses, which presents myriad issues, both operational and regulatory.
Inside the Fed, officials have been worried about AIG's fourth-quarter loss and about the risk that the insurance giant will have its credit rating downgraded.
AIG's share price has fallen nearly 59% since the end of January and ended trading Monday at just 53 cents a share.
That AIG would be reporting large investment losses in the fourth quarter is not, in and of itself, a huge surprise given the turmoil in the financial markets late last year and the breadth of the company's portfolio.
In a statement Monday, the company said it is continuing to work with the government "to evaluate potential new alternatives for addressing AIG's financial challenges." The company has a week to report fourth-quarter and full 2008 earnings.
"We will provide a complete update when we report financial results in the near future," AIG said.
Mortgage Write-Downs
AIG's results are expected to include large write-downs of its exposures to commercial mortgage debt, which suffered record price declines during the fourth quarter of last year. Delinquencies among real-estate loans, which help finance office buildings, shopping centers and other properties, are also on the rise, a factor that is weighing on their values.
A Merrill Lynch index of triple-A commercial real estate securities indicates prices declined around 13% in the fourth quarter and currently trade at around 75% of their original values. Similar securities with lower ratings fared much worse -- some declining 50% or more during the quarter.
Even though the Federal Reserve helped AIG unwind some of its troubled swap positions last November by purchasing the underlying securities, AIG continued to incur collateral calls and further write-downs on swaps tied to certain mortgage-related positions that couldn't be unwound easily. Most of the troubled collateralized debt obligations were backed mainly by subprime-mortgage collateral, and their prices also slumped further during the fourth quarter.
Threat of Further Calls
The threat of further collateral calls is one major reason why a downgrade in AIG's credit ratings could pose an immediate threat to its liquidity.
Standard & Poor's has an A-minus long-term rating on AIG, and Moody's Investors Service has an equivalent rating of A3. Both credit-rating firms said Oct. 3 they were reviewing the ratings for downgrades. Such reviews typically take around 90 days, but have been known to go longer.
Rating downgrades from current levels could be devastating to AIG's finances and would trigger billions of dollars more in payments to its policyholders, trading partners and customers.
A one-notch rating cut would push AIG's long-term ratings down to BBB-plus at S&P and Baa1 at Moody's. A downgrade would also likely cause AIG's short-term debt ratings to fall below their current level of A-1, which is the minimum rating threshold for borrowings under the Federal Reserve's Commercial Paper Funding Facility.
Since that facility went live in late October, AIG and its units have been tapping it to the tune of around $15 billion. A loss of access to these rolling three-month loans -- which have very low interest rates -- may force the company to draw down more of its credit line from the Fed and incur significantly more in interest costs.
In a November filing with the Securities and Exchange Commission, AIG warned a one-notch downgrade of its long-term rating could cause it to have to pay out around $8 billion to its counterparties, including collateral and "termination payments" on contracts it has written.
The impact of a two-notch downgrade from current levels could be much bigger, giving counterparties the right to terminate transactions that cover nearly $48 billion in debt. AIG has posted collateral against some of those positions, so its actual cash outflow in such a situation would likely be less than that amount.
I remember my younger days, when we used to visit Katong Park or Tanjong Rhu and...Pasir Panjang, where we enjoyed the simple things in life without any cost and just enjoyed the light from the sky, playing on the water of the sea.
Cos the piggy bank is oready EMPTY?
