The UK’s Times reports that AIG is looking to liquify some holdings to shore up its balance sheet and hopefully its stock price. While AIG, like Lehman, is making a “reassure investors” presentation ahead of its scheduled earnings announcement, the article gives the impression that AIG can provide a more concrete, readily executed salvage operation than Lehman did mid last week.
However, AIG is perceived to be sufficiently weakened that bankers meeting with the Fed and Treasury on Saturday mentioned AIG, along with Merrill and WaMu, as the next shoes that might drop. Insurance experts contend that their situations are different (you can’t have a run on an insurer, and lMBIA and Ambac have managed to soldier on in weakened form despite having a business model that is not viable in the long term).
From the Times:
AIG, the world’s largest insurer, is planning a $20 billion (£11 billion) asset sell-off as it fights to correct a record slump in its share price and braces for the impact of Hurricane Ike.
Details of the plans could come as early as tomorrow. On Friday the insurer appointed investment bank JP Morgan to work on a rescue plan after its shares fell a record 31% in a single day.
Assets under the hammer include Transatlantic Holdings, its New York-listed reinsurance group. Swiss Re and Munich Re, two giants of the European reinsurance business, are understood to be potential buyers. Other assets on the block are AIG’s consumer finance, reinsurance and plane-leasing units, according to analysts at Citigroup…
As much as a program of that magnitude might assuage concerns (provided the price estimates for the asset sales seemed reasonable), they may be seen as insufficient. From the New York Times:
A.I.G., one of the world’s largest insurers, may need to raise $30 billion to $40 billion to avoid a severe downgrade to its credit rating, according to people briefed on the situation [at the Lehman meetings on Saturday]. An A.I.G. spokesman, Nicholas J. Ashooh, called that estimate speculative and declined to comment further.
But there is such a thing as a run on an insurer, in the form of claims any how. And that’s where the problem is. How does the company expect to raise that kind of money in a climate where companies like WAMU, Lehman, and Merril are facing tremendous troubles?
Just this week it was announced that the companies Mexican arm hopes to insure 140,000 Mexican mortgages by 2013. I hope they can fare better in the Mexican Housing market than they are in the U.S.
Sorry here’s a link.
Yves: this should help answer the question why the Fed is adamant about not bailing out Lehman:
” China may cut its dollar holdings – CICC
China, which holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may cut the portion held in US dollars, according to China International Capital Corp (CICC), one of the nation’s biggest investment banks.
The US government this week seized control of the two mortgage-finance companies, which account for almost half of the home-loan market in the world’s biggest economy, to prevent defaults from crippling them. China holds up to $400 billion in the two firms’ debt, CICC Chief Economist Ha Jiming said in a report Thursday.
“The crisis has made Chinese officials realize it’s a bad idea to put all their eggs in one basket,” wrote Hong Kong-based Ha. “This will likely lead to greater diversification of foreign exchange reserve investments.”
Now let’s correlate this with another piece of news I saw today which incidentally disappeared within 15 minutes, this time again on Bloomberg:
Paulson Adamant No Money for Lehman, Fed Against It (Update1)
Treasury Secretary Henry Paulson is adamantly opposed to using government funds to aid Lehman Brothers Holdings Inc., and Federal Reserve officials are inclined to agree.
A person familiar with Paulson’s thinking said Wall Street has been aware of Lehman’s troubles for a long time and had time to prepare for any crisis at the company. The access Lehman has to loans from the central bank will allow an orderly process, the person said. Fed officials are aligned with the Treasury and have a strong predisposition against use of government money.
So, now we know what’s really going on. It’s not that the PPT suddenly has seen the light. The Chinese are threatening to finally pull the plug if their considerable Dollar holdings should be exposed to further inflationary action by the Feds. That would be a BAD thing – trust me. If that happens you can kiss the Dollar good-bye. And we already know from the FNM/FRE debacle that the Feds have no compunction about handing U.S. equity holders the shaft whilst protecting the interests of foreign debt holders like the Chinese, the Russians, the Japanese, etc.
THAT is why LEH won’t be handed to GS or BAC on a silver platter paired with a juicy Fed cash injection or some kind of creative asset swap for treasuries: The Chinese had enough and are threatening to start dumping Dollar assets if the Feds continue to running their printing presses whilst bailing out every investment bank in trouble (which is most of them). The market has been ‘pricing in’ bank failures at this point (just look at the last few days of market tape) and the Feds are now forced to draw a line in the sand. They would have never done this on their own account, that’s for sure.”
AIG ‘needs to raise $30-40B.’ *sigh* They’ve had a year to sell those profitable units and fort up behind bales o’ bills. Too late in the game, now, supposing that they even got a good price. No one who’s ever flown as high as AIG or LEH can bring themselves to believe that they’ve failed and that it’s probably over, so emergency steps never get taken until long past the time they might do any good. This is a comment on the self-delusions of the human condition more than on any financial structural flaw or bad business practice, more theater of the soul than (accounting) coroner’s inquest.
. . . It’s warm late summer, here; our Soundside take on days of heaven. Were I not earning my daily crumb I’d lie out under the stars, and think of millennia of works and days turning through them. I recommend it, and a glass of wine. That makes our trials of an hour seem the ripplet on time’s pond that they actually are.
I’m not 100% sure, but i think AIG has to settle a lot of their security cds contracts by swapping cold hard cash for the outright instruments (which are at best illiquid and, at worst, worthless) as opposed to just paying the insured the difference.
They also have a lot (though unquantified) exposure to the European housing market (which Jeremy Grantham thinks is going down 40%, peak to trough).
This could get really really ugly.
In several previous articles the idea of a “run on the insurer” has been dismissed as not possible. However it is possible under the conditions of policies that build cash value.
Of interest to many may be the perhaps little known fact that during the depression insureds did “run” to their insurance companies and ask for their cash, actually surrendering their policies. It created real problems for insurance companies who found the answer with a condition now found in all cash value policies. Companies can take up to 6 months to get your cash to you. Once you complete all the appropriate paperwork and file it with the company they can take up to 6 months to send you your money.
Of course if you ask an agent if the company would do such a thing they will deny that it could happen, but it can and it did during the depression.
Since “cash value” is invested by insurance companies they retain very little and if forced to sell investments early to pay policyowners they may well suffer a loss thus they built this 6 month provision into their policies. Think of it as a “bank holiday” … the bank is closed so you can’t get your money.
Imagine if you will thousands or tens of thousands of policyholders surrendering their policies. While the company does not have to pay it all out today there is a definitive date no more than 6 months in the future that payment must be made by assuming the company still exists.
This scenario has happened before. But most likely not to many (if any) readers of this blog.
As for the guarantee associations that most states maintain. They are woefully underfunded and could not handle the failure of a major insurer. In fact in most states it is illegal for an agent to discuss the insurance guarantee association and its “benefits.” Companies don’t want insureds thinking “it doesn’t matter if the company goes under the state will bail me out.”
Maybe AIG can start by selling Stowe, it’s ski area/executive enclave here in Vermont.
Many of the runs have great AIG names like Starr…..
Sounds to me like Goat may be the most appropriately named trail at Stowe at this point. Two fall lines, or two fall down lines?
The scenarios worsen markedly if a ratings downgrade comes for AIG. It’s harder to raise capital and harder to finance their holdings. And the mood of the ratings agencies has been rather sour lately.
As a tremendously important player/market maker in the CDS market, they are also exposed to far greater risk than some of the other insurers.
For a number of reasons, I think their downfall would be every bit as traumatic as an LEH collapse, likely more so. There is indeed heavy smoke coming from the gunpowder factory.
In terms of the Fed, I think M is clearly correct in his view about their overall objective here. I would add that the Fed is a public/private hybrid and will act in their OWN self-interest to protect the value of their Treasury holdings.