naked capitalism

This is truly unbelievable. Even as little as a week ago, the idea that AIG, the world’s biggest insurer, would go begging the Fed for help would have seemed daft. But that’s now an element of the meltdown in progress.

And AIG is a major credit default swaps writer, bigger than Bear. If Bear could not be allowed to fail, AIG certainly can’t come apart. But how can the Fed extend a lifeline to a party it doesn’t regulate, or even have as a counterparty? The Primary Dealer Credit Facility was a clever move, but was not in place soon enough to save Bear. This is even more of a stretch, and on an even more pressured timetable.

From the Wall Street Journal:

Insurer American International Group Inc., succumbing to relentless investor pressure that drove its shares down 31% on Friday alone, is pulling together a survival plan that includes selling off some of its most valuable assets, raising more capital and possibly going to the Federal Reserve for help….

During a weekend scramble to shore up its finances, AIG turned down a capital infusion from a group of private-equity firms because it would have effectively given them control of the company…..

Yves here, That is not going to endear them to the Fed, turning down a deal, particularly when Merrill did the right thing and sold itself to avert a possible systemic event. This is brassy and risks overplaying their hand. If I were the powers that be, I’d tell them to stuff it and take the deal.

When AIG’s board rejected the capital infusion, the company’s recently appointed chairman and chief executive, Robert Willumstad, took the extraordinary step of reaching out to the Federal Reserve for help. The Fed usually deals with banks and brokers, and it wasn’t clear what it could do…
The assets AIG intends to sell include its domestic automotive business and its annuities unit, according to people familiar with the matter. It also looked into selling its aircraft-leasing arm, International Lease Finance Corp., but it isn’t clear whether action on ILFC will be part of the emergency steps.

AIG also may shift assets from its regulated insurance business to its holding company, which would help the holding company respond to demands for cash or collateral…..

The rush for cash represents a remarkable comedown for AIG, whose role in global finance is in many ways as critical as investment banks such as Lehman Brothers….

Eric Dinallo, the insurance superintendent in AIG’s home state of New York, took a significant role in the talks over the weekend, according to a person familiar with the matter. One key issue, the person said, was the proposed shift of assets. Insurers typically face stringent regulations on how they use their assets, as regulators seek to make sure that they can meet their obligations to policyholders…..

Among its challenges: It doesn’t have access to the Fed’s lending window, as some other troubled financial firms do. It could face significant claims from Hurricane Ike, which battered the Texas coast over the weekend. It had to pay a stiff premium in August when it borrowed money in the corporate bond market…..
private-equity firms would take in an AIG investment, and whether they have enough capital to make a dent in AIG’s problems
It’s not clear whether AIG has buyers lined up for any of the assets it wants to sell. Also unclear is how much interest.

For more detail on the proposed asset sales, see here and here.