AIG on the brink – SMH 17-9-08

Article from SMH 17-9-08 and comments

Insurance giant American International Group neared collapse yesterday, prompting further panic on global markets and a flurry of reports about a last-minute rescue to avert a financial calamity.

Shares in AIG – a company with one trillion dollars in assets and tentacles in many markets – went on a roller-coaster ride, sliding 70% at the open, swinging into positive and then closing down 21% after a 60-per cent plunge Monday.

But the Federal Reserve is considering extending a ”loan package” of as much as $US75 billion ($94 billion) to avoid a cash crunch and bankruptcy, according to a person familiar with the negotiations.

The stance by federal regulators is a reversal from a position they held as late as last night, and people with knowledge of the talks are ”cautiously optimistic,” .†

AIG is searching for capital to stave off a collapse after its credit ratings were cut late yesterday. AIG’s fight to stay afloat is the latest tremor to shake the global financial industry, less than a day after Lehman Brothers filed for Chapter 11 bankruptcy protection and Merrill Lynch sold itself to Bank of America.

”To the extent that a bridge loan or some type of liquidity provision allows AIG time to sell some assets on its balance sheet and time to maintain it’s investment-grade rating at A or higher, I think it’s a good move,” Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management said in a Bloomberg TV interview.

”The Fed doesn’t have to necessarily put its own capital at risk,” Gross said. ”We’ll see what the plan says, but I think it’s definitely a necessary step.”

Goldman Sachs and JPMorgan Chase were working with AIG to determine how much the insurer needs, said two people familiar with the talks yesterday. Goldman has helped the Fed appreciate the effects that an AIG collapse would have on financial institutions, the first person said.

The failure of the American banking system has and will continue to flow through and effect†Australia as our banks have sourced funds out of the US. Further, our banks would have exposure to the†Lehman†liquidation and others that have failed which means they may not recover money lent. This all effects liquidity in the markets.

It’s impossible to quantify the losses in the US or in Australia however because asset values are falling and a balance sheet that looks healthy one day can be heavily geared a week later and potentially insolvent a few months on as asset values drop.

Part of the problem has been the loose credit policies of the past with loans being made to people and businesses without rigorous financial due dillegence on their ability to repay. This problem combined with the collapse of the US property markets means that Lehman, Bear Sterns and now AIG and others have loans†in their accounts†that will only realise a fraction of their book value. So much for greed and the pursuit of profits.

These problems affect confidence and the world is looking at recession and even now starting to use the “D” word. If that occurs, and the economies of the world do contract, the Australian economy will not be immune particularly where commodities prices reduce together with less demand for those items.

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