The numbers and the measures become more and more extreme. For AIG to get permission from regulators to move $20 billion in capital from its subs to the holding company and have significant asset disposals teed up wasn’t sufficient to shore up the embattled insurer., The Fed has reportedly convened yet another emergency session to see if the usual suspects might be able to somehow aid the embattled insurer. The Wall Street Journal reports that the Fed has leaned on Goldman and JP Morgan for an emergency $70-$75 billion loan as well.
It is a bit of a mystery to me why a loan request would be made. The sword of Damocles hanging over AIG is a possible downgrade by rating agencies, who want the big insurer to come up with $30 to $40 billion more in capital. Even if Goldman and JP Morgan went along with the Fed’s request, it isn’t obvious how a large loan helps. Suibordinated debt might help, but rating agencies look more favorably upon common and preferred stock. A bridge loan against an asset sale? Again, not sure how this advances the creditworthiness.
I am normally not at a loss, but the logic has me perplexed. The only other role for the funds might be to help meet collateral posting requirements in the event of a downgrade, I cant’ imagine the two financial firms would be up for that risk in the absence of backdoor government support.
Anyone with some insight is welcome to comment.
Consistent with my “huh” reaction, the Financial Times has a report that makes more sense, although who knows where the truth lies, that the Fed is hosting emergency talks on AIG but has not asked Goldman and JP Morgan to provide loans, nor has it offered to provide indirect support.
From the Wall Street Journal:
In an effort to prop up giant insurer American International Group Inc., the Federal Reserve on Monday asked Goldman Sachs Group Inc. and J.P. Morgan Chase to help make $70-$75 billion in loans available to the company, according to people familiar with the situation.
The move came as officials on both the state and federal level scrambled Monday to help AIG find ways to come up with as much as $40 billion to help prevent a downgrade of its credit rating, an outcome that could ultimately prove fatal for the firm. It wasn’t immediately clear whether the banks would agree to the government’s request…..
From the Financial Times:
The New York Fed is hosting a fresh set of crisis talks to deal with the problems at AIG, the troubled insurer. JPMorgan Chase, representing AIG, and Goldman Sachs, representing potential principal investors, are in the building working to come up with some kind of funding facility for AIG.
The Fed has convened the parties and is facilitating their discussions. But it has not asked JPMorgan and Goldman to provide $70bn in funding for the company, and at this stage has not discussed itself lending indirectly to AIG via back-to-back transactions intermediated by the investment banks, one possible way of channeling liquidity to AIG.