AIG’s future uncertain in wake of subprime-related security woes

American International Group Inc. (AIG)’s stock took a serious hit following disclosure that American investment banks Lehman Brothers Holdings Inc. had declared bankruptcy and Merrill Lynch was sold.
Shares in AIG fell 31% on Sept. 12, and then plummeted more than 60% on the morning of Sept. 15, as investors grew concerned that the firm lacked capital to withstand cuts to its debt rating, reports the New York Times.
When AIG began to try to raise capital earlier this year to recover from declining values in mortgage-related securities held in its investment portfolio and collateralized debt obligations, it had to open its books to potential investors, the New York Times says.
“And with Lehman Brothers last week providing investors with a valuation for the same types of assets held by AIG, subprime and Alt-A mortgage securities, the investment bank’s marks can now be applied to the big insurer’s books.”
The insurer sought a US$40-billion bridge loan from the Federal Reserve as a lifeline.
Reports note the firm hired Morgan Stanley to negotiate the terms of the loan; as of late-afternoon on Sept. 15, AIG had secured approval from New York state authorities to liberate US$20 billion from its own balance sheet, reports London’s Times Online.
“The agreement, signed off by David Paterson, the state governor, formed part of a wider financial rescue that could see the US Federal Reserve Bank lend AIG a further US$40 billion,” the Times Online adds.
“The firm, which has generated US$18.5 billion of losses during the past nine months, is considering selling off its consumer finance group, parts of its reinsurance arm and its financial products arm in a battle to raise cash.”