The survival of AIG, one of the world’s largest insurers, depended on the US government on Tuesday after hopes of private sector bail-out appeared to have faded.
Regulators and company executives held a fresh round of emergency meetings at the New York Federal Reserve amid fears that the collapse of the troubled insurer would further destabilise the global financial system.
The talks took on renewed urgency after a series of sharp credit rating cuts on Monday sent AIG’s shares into a further tailspin and its debt traded at highly distressed level. Amid increasingly desperate lobbying for government help, David Paterson, New York’s governor said the beleaguered had a “day” to solve problems.
Bankers said the company’s future depended on whether the government was prepared to provide a financial lifeline, at least on a temporary basis. The government has stressed its reluctance to provide any taxpayers money to prop up AIG. However, one possible option could be for a loan to be made via a third party, such as bank which can access funding from the Federal Reserve.
Estimates for the size of the funds needed to ensure liquidity for the insurer continues to grow. The latest estimates are that it would need some $70bn to shore up its balance sheet, up from the $40bn that was discussed over the weekend.
AIG is the biggest provider of commercial insurance in the US, one of the biggest writers of life assurance there, and the biggest provider of fixed annuities, a popular retirement savings product. It also has enormous global operations.
Spiralling subsidiaries
AIG is a huge multinational insurer, but it is much more than that. A glance at the group’s structure shows why. Should it follow Lehman into administration, it would create shockaves across global financial markets. View our diagram of AIG’s structure
Once the biggest insurance company in the world, its market capitalisation has fallen to just over $7.5bn.
Bankers involved in discussions said that any plan to try and raise some $70bn in loans from investors had been scuppered by the credit downgrades and the sharp fall in AIG’s shares on Tuesday.
The company’s executives and its advisers were holed up in the offices of the New York Fed in an attempt to find a solution to at least give AIG more time to unwind its credit default swap positions, the source of many of its recent losses.
People close to the discussions said government help was needed to give AIG time to separate AIG’s insurance operation from its troubled portfolios of assess credit default swaps and investments.
Goldman Sachs has been hired by AIG to assess the potential losses on its bad assets. JPMorgan Chase and Blackstone are advising the company, while Morgan Stanley is helping the Fed consider its options.
New York insurance regulators on Monday said AIG could access up to $20bn of capital held by life insurance subsidiaries. However, access to such capital was dependent on the insurer securing a longer-term financing plan according to people involved in the plan.
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