AIG May still be too large for the government insurer Let Fa

 

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MarketWatch

24 February 2009 Tuesday 3:43 PM EST

SECTION: NEWS & COMMENTARY; Markets

LENGTH: 932 words


TITLE: AIG May still be too large for the government not to allow the insurer

Signed: Alistair Barr, MarketWatch mailto: ABarr@marketwatch.com.

Alistair Barr is a reporter for MarketWatch in San Francisco.



SAN FRANCISCO (MarketWatch) - American International Group is too large and inter-connected with the rest of the financial system, so that the U.S. government should take more radical measures to help ensure that the insurer could be fatal decline in credit ratings in the coming weeks, said analysts Tuesday.

AIG (AIG) is expected to report a quarterly loss of approximately $ 60 billion, next Monday, the Wall Street Journal reported, citing unidentified people familiar with the matter.

"The loss would most likely lead to lower credit ratings, which in turn, lead to calls for security," CreditSights, a fixed income research firm, wrote in a note to investors.

The drop last year by Standard & Poor's and Moody's Investors Service has killed close to AIG and forced the government to bail out the insurer for a loan of $ 85 billion in exchange for a stake of nearly 80 %. Refloating climbed to $ 150 billion in November a package that includes a new loan of $ 60 billion and $ 40 billion of public investment in perpetual preferred shares issued by AIG.

The government is such great lengths to support AIG, because it is one of the world's largest counterparties in the market for credit default swaps, a type of derivative that protects investors against default of payment.

If AIG collapses, counterparties, including several major European financial institutions, could be left waiting to be reimbursed with other creditors in the bankruptcy. Such a scenario could lead to the financial system to its knees almost happened when Lehman Brothers (LEHMQ) collapsed in September.

"The federal government is maintaining a system of survival for AIG," said Sean Egan, president of Egan-Jones Ratings, a rating agency that is paid by investors rather than investors. "If they pull the plug, they are dead. We do not want that to happen again. "

A spokesman for AIG said Monday that the insurer is to assess "the potential for new solutions" to the Federal Reserve Bank of New York to address its problems. He refused to comment further, as did a spokesman for AIG and a representative of the New York Fed on Tuesday.

Under the new plan under consideration for AIG, $ 60 billion government loan would be repaid with a combination of debt, equity, cash flow and operating a business, Wall Street Journal reported. The re-organization, which is equivalent to a debt-equity swap will be announced next Monday when AIG reports fourth-quarter results, said the newspaper.

Assets, such as AIG's Asian life insurance companies, would be transferred to the government instead of money to repay part of the $ 60 billion loan, told the newspaper.

AIG share dropped from 26% to 39 cents Tuesday.

The government is trying to buy more time to relax some of the activities of AIG and sell other assets, so that if the insurer or stop the collapse in the future, it will not affect the overall economy much, "said Egan.

"In 12 to 24 months, there will be a decision to close or allow AIG to more private capital in. By then, hopefully, AIG does not pose such a threat to the whole economy", he said.

The government is "right thing" to try to maintain order in the financial markets and the economy in general, but he made a serious strategic error several years ago when he allowed AIG "massively wrong and evil evaluate the price risk. " Egan said.

In November, AIG believes that if Moody's and S & P declining long-term senior debt rating one notch, the insurer would have to come to nearly $ 8 billion in guarantees and indemnities for dismissal by the counterparties.

Two notch below counterparties would terminate the CDS contracts covering $ 47.8 billion of debt. AIG said in November that the cost of replacing these contracts can not be reliably estimated.

The government helped AIG unwind many of these contracts since November, but some of these agreements are more difficult to resolve.

It is also unclear whether the re-organization said the government loan to avoid a downgrade of AIG notes.

A debt for equity swap is often considered a "de-facto default" Egan said on Tuesday. Under normal circumstances, it would be very bad for the business and credit notes, he explained.

However, ratings for the major, major companies such as AIG policies, as well as credit analysis, Egan added.

The government has some influence on the major rating agencies like Moody's and S & P, but any attempt to persuade them to expect a decline in AIG undermine confidence in the notes in general, "said Egan.

"We are in the twilight zone of credit analysis," he continued. "AIG could not meet its obligations, but the federal government has shown willingness to support the institution."

The spokesman for Moody's, S & P and Fitch Ratings declined to comment Tuesday.

Moody's and S & P said in October that they were examining AIG advice for a possible fall.

In January, Moody's said that the continuation of government support was crucial.

"The current rating on AIG and its subsidiaries, reflects Moody's expectation for continued support of the U.S. government," the agency said on January 14.

This support contributes to AIG to meet short term liquidity needs, while giving it time to sell the business and leisure contracts written by AIG Financial Products Corp., the derivatives unit, said the agency.

"Without this support, ratings of AIG and several of its subsidiaries - including basic operations and businesses identified for sale - would be lower," Moody's warned.

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