AIG shares plummet as bankruptcy looms
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US Insurance giant AIG saw its share price plunge 70 percent to 1.31 dollars at the Wall Street opening on Tuesday. New York Governor David Paterson gave the company one day to raise up to 80 billion dollars to avoid bankruptcy.
American International Group neared collapse Tuesday as a credit downgrade put the insurance giant into a death spiral that analysts said could deepen the global financial crisis.
News reports said AIG was is crisis talks at the New York Federal Reserve, seeking a short-term loan of as much as 75 billion dollars to avert a cash crunch and bankruptcy.
New York Governor David Paterson said AIG had one day to raise up to 80 billion dollars to stave off bankruptcy.
"I think they have a day ... we're in the moment right now as to whether or not they can put something together. I guess it would be 75 to 80 billion dollars," Paterson told CNBC television.
On Wall Street, AIG shares fell as much as 70 percent at the open but rebounded on hopes for an aid package from the Fed. At 1515 GMT, AIG was down 22 percent at 3.71 dollars, taking its worth down to 10 billion dollars. Shares fell over 60 percent on Monday.
David Kotok, chief investment officer at Cumberland Advisors, said the US central bank must act to avert a collapse at AIG that would be a calamity for markets that went into shock after the Lehman Brothers' bankruptcy Monday.
He said that although AIG is not a primary dealer with access to the Fed, "is a huge global financial enterprise ... That is why the Fed must act."
"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."
Liz Ann Sonders, chief strategist at Charles Schwab & Co., said a Fed bailout might set a bad precedent.
"Some expect the Fed to offer the same treatment to AIG as it did to Lehman, but other believe the Fed will distinguish between its lending programs and the use of taxpayer funds," she said.
"Nonetheless, the Fed's Board of Governors would need to approve the terms of any type of loan. And the bar is going to be set quite high as expanding the discount window to another class of firms brings with it Pandora's Box-type risks, as 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 down 25 billion dollars amid spiking defaults on US mortgage payments in the United States.
After Wall Street investment bank Lehman Brothers filed for bankruptcy protection and peer Merrill Lynch was swallowed by Bank of America Monday, it looked like AIG may be the next domino to drop in the swiftly deteriorating US financial crisis.
The stakes are high for a company that until only recently had been long considered the world's largest insurer. In the past year it has been battered by the global credit crunch and the worst US housing slump in decades.
AIG has 74 million customers worldwide, most of them American, who would find themselves without insurance if the company goes bankrupt. It employed 116,000 people in 130 countries at the end of 2007.
New York state has thrown the only lifeline of sorts to AIG, announcing Monday that the company can, in effect, loan itself 20 billion dollars, by borrowing against its assets.
According to media reports, among the assets AIG is hoping to sell is its aircraft leasing business, International Lease Finance Corporation, which has a fleet of 1,000 planes.
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