Updates on AIG
| Title | : | US launches AIG rescue loan to avoid market catastrophe |
| By | : | |
| Date | : | 17 September |
| URL | : | http://www.channelnewsasia.com/stories/afp_world_business/view/376493/1/.html |
| NEW YORK: The US Federal Reserve announced Tuesday it would make an unprecedented US$85-billion rescue loan to save insurance giant American International Group (AIG) from bankruptcy amid fears of a catastrophic meltdown on financial markets.
A central bank statement said the Federal Reserve Board made the decision “with the full support of the Treasury Department” under Section 13(3) of the Federal Reserve Act. “The secured loan has terms and conditions designed to protect the interests of the US government and taxpayers,” the statement said. All of AIG’s assets would be pledged to secure the loan while the Fed would retain a nearly 80-per-cent stake in the company, the Fed announced. The move came after federal officials reportedly tried but failed to persuade private firms over the weekend to put up funds to save AIG. With the vast insurance firm facing bankruptcy, Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke and Fed President Timothy Geithner decided that a federal lifeline was needed to prevent a disastrous fall-out in the financial markets. The final decision came on Tuesday, as officials agreed it would be “catastrophic” to allow the company to fail, the Wall Street Journal reported, quoting an unnamed source familiar with the deal. Paulson and Bernanke reportedly went to Capitol Hill late Tuesday to meet with top leaders of Congress, and an influential New York senator, Charles Schumer, confirmed a historic move was in the works. “The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times,” Schumer said in a statement after meeting regulators about New York-based AIG. “Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse,” said the Democrat, a member of the Senate Banking Committee. Shares in AIG - a company with US$1 trillion in assets and tentacles in many markets - went on a roller-coaster ride on Tuesday, sliding 70 per cent at the open, swinging into positive territory and then closing down 21 per cent after a 60-per-cent plunge Monday. New York Governor David Paterson earlier said AIG had one day to raise up to US$80 billion to stave off bankruptcy and avoid financial calamity. In its first public statement since its shares went into a freefall on bankruptcy fears, AIG said earlier its insurance, retirement and other financial services were operating normally. AIG said its businesses “including its extensive Asian operations, continue to operate normally and remain adequately capitalised and fully capable of meeting their obligations to policyholders.” The statement added that AIG “continues to pursue alternatives to increase short-term liquidity in the parent company.” David Kotok, chief investment officer at Cumberland Advisors, said earlier the US central bank had to act to avert a collapse at AIG that would be a calamity for markets - which went into shock after the Lehman Brothers’ bankruptcy Monday. “This has the appearance of a cascade or a contagion. Failure of Lehman Brothers has created contagion because of counter-party risk that was not contained by the Fed,” Kotok added. “Failure of AIG will make this much worse.” But Liz Ann Sonders, chief strategist at Charles Schwab & Co., said a Fed bailout might set a bad precedent. She said “other companies would undoubtedly look in the Fed’s direction for help.” In blow after blow late Monday, the three main rating agencies - Standard & Poor’s, Moody’s and Fitch - lowered AIG’s credit score in a sign of solvency troubles for AIG. Sonders said that according to AIG regulator filings, the rating cuts are likely to trigger up to 17 billion in collateral calls. Far more than other insurers, AIG has been a big player in a complex parallel market called credit default swaps (CDS), financial instruments in which Wall Street companies take out a form of market insurance against the risks of bond default. These products, often linked to the US real estate market, are at the heart of the current banking crisis and have led to massive write-downs of assets around the world. AIG alone has written off US$25 billion amid spiking defaults on US mortgage payments in the United States. - AFP/yb |
September 17th, 2008 at 1:59 pm
September 17, 2008
A.I.G. Is Still Profitable, With a Wide Array of Enterprises
By JONATHAN D. GLATER
American International Group and its assortment of businesses run the gamut from aircraft leasing to life insurance for Indians to retirement plans for elementary schoolteachers. Parts of the company have been battered by the credit crisis.
But many of its operations may put up for sale — as the Federal Reserve signaled they would be when it announced its rescue of the company Tuesday night — and they could prove attractive to prospective investors and competitors. The main insurance unit has remained profitable, as has the aircraft leasing arm.
American International Group and its assortment of businesses run the gamut from aircraft leasing to life insurance for Indians to retirement plans for elementary schoolteachers.
The great assortment of assets reflects the determination of the man who built A.I.G., Maurice R. Greenberg, to create an global empire operating in complementary businesses. Not even the company’s annual reports to shareholders or its regulatory filings offer a chart of its complex corporate structure.
Though its name is American, the company is rooted in Asia. According to company lore, its founder, Cornelius Vander Starr, a World War I veteran, traveled to Asia with only 300 Japanese yen (less than $3 by today’s exchange rates) in his pocket and started the firm in Shanghai in 1919.
With a partner, he sold marine and fire insurance and expanded rapidly throughout the Philippines, Indonesia and China by hiring locals as agents and managers, a business strategy A.I.G. uses today. Nearly half of A.I.G.’s 116,000 direct employees — about 62,000 people — are in Asia.
In 1960, Mr. Greenberg joined the company, following his mentor, an executive at Continental Casualty Company in Chicago. Mr. Greenberg focused on making giant commercial deals, increasing its share of the life insurance business and writing what were, decades ago, unusual types of coverage, like insurance against kidnapping and protection from suits against a company’s officers and directors.
A.I.G.’s general insurance business, which accounted for nearly half its $110 billion in revenue last year, has held up well. A.I.G. claims that its companies are the largest underwriters of commercial and industrial insurance in the United States. Its policies cover everything from environmental liability for companies to auto insurance.
A.I.G.’s asset management group — it includes a private banking subsidiary for the wealthy, a broker dealer and another unit that manages mutual funds — has had losses, but it is not a unit that pushed the company to the brink. That group reported its first loss in years in the last quarter of 2007; in the second quarter of this year, it reported an operating loss of $314 million, which is modest these days.
Then there is the aircraft leasing business, which owns more than 900 planes and is part of the company’s financial services group. The company stated in its annual filing with regulators that the leasing unit would buy 73 new aircraft this year. That unit is profitable, according to the most recent report for the quarter ended June 30.
A.I.G.’s problems rest in the company’s London-based financial products unit, part of its financial services group, which is exposed to securities tied to the value of home loans — the same kind of securities that forced Lehman Brothers into Chapter 11 bankruptcy proceedings on Monday. The financial products group sold credit-default swaps, complex financial contracts allowing buyers to insure securities backed by mortgages. Many of the buyers were European banks. As home values have fallen, the value of the underlying mortgages has declined, and A.I.G. has had to reduce the value of the securities on its books.
The company has other forms of real estate exposure. One subsidiary, American General Finance, makes home loans and has suffered along with the housing market. Another subsidiary, the United Guaranty Corporation, provides mortgage guarantee insurance. Still other units buy mortgage-backed securities directly.
“We’ve always been opportunistic,” Mr. Greenberg said, responding to a question about whether the company would buy other insurers struggling in the wake of the Sept. 11 terrorist attacks. “When we see opportunities, we will never change. At A.I.G., it’s part of our culture.”
Geographically, A.I.G. is sprawling. One of its life insurance company operates in 50 countries and other units offers other products, like health insurance and retirement services, in countries like Japan and the United States. It claims to be the largest life insurance company in the Philippines. Its private bank is based in Zurich.
A.I.G. ’s Asian asset management business has $115 billion in assets, and the company peddles mutual funds in the Philippines, Hong Kong and Singapore and investment trusts in Taiwan.
The company is a sizable investor in Asian development projects, from toll roads in the Philippines to Seoul’s international finance center. It is also a major investor in the Taiwan government. As of February, A.I.G. held $14.2 billion in Taiwan government bonds, 13.1 percent of Taiwan’s total issued government bonds.
Though he left the company a few years ago after an accounting scandal, Mr. Greenberg’s fortune remains locked up with A.I.G., in which he has a stake of about 11 percent through various holdings, according to Bloomberg News.
Early in 2005, questions arose about financial transactions that had the effect of making the company’s earnings look better. Mr. Greenberg resigned as chief executive after regulators sent a wave of subpoenas to the company; eventually A.I.G. restated earnings covering a five-year period. His successor tried to restore confidence in the company but his efforts did not meet with investor approval and he was replaced this summer, after the company announced that it lost $7.8 billion in the first quarter of the year, the biggest loss in its history. In August it announced that it had lost another $5.3 billion in the second quarter.