Insurance Giant AIG Faces Cash Crisis, Fights For Survival

From Wall Street to Main Street to the corners of the world's financial capitals, the meltdown of America's bedrock financial institutions was being felt Tuesday as another giant, AIG — the world's largest insurer — struggled to avoid the same fate.

The crisis at AIG comes as the Dow suffered its worst percentage loss in more than six years Monday as the markets were slammed by an historic weekend that left Wall Street without financial giants Lehman Brothers and Merrill Lynch.

The momentous selloff came as insurance giant AIG lost more than half its value and crude oil futures plunged more than $5, closing below $100 a barrel for the first time since March.

AIG was hit by a wave of downgrades by credit-rating agencies worried that the deteriorating housing market is further undermining the company's battered finances.

All three major agencies — Standard & Poor's, Moody's Investors Services and Fitch Ratings — dropped AIG's ratings at least two notches late Monday. While the new ratings are all still considered investment grade, the downgrades add to the pressure on AIG as it seeks billions of dollars to strengthen its balance sheet.

AIG spokesmen did not return calls seeking comment on the impact of the downgrades. But last month, the company estimated in a regulatory filing that a one-notch downgrade of its long-term senior debt ratings by both S&P and Moody's would force it to post $13.3 billion in extra collateral.

The need for that extra capital would put a constraint on AIG's day-to-day liquidity position, which is why the company has been seeking new financing or capital investments.

AIG is in a precarious position, in part, because of concerns about its credit ratings and how that would affect its portfolio of financial instruments known as credit default swaps. The swaps are essentially insurance coverage to protect investors against defaulting bonds or debt.

Moody's said it downgraded AIG "in light of the continuing deterioration in the U.S. housing market and the consequent impact on the group's liquidity and capital position due to its related investment and derivative exposures."

AIG has been battered over the past year by billions of dollars of losses tied to deterioration in the mortgage and credit markets. On Monday its shares fell $7.38, or 60.8 percent, to close at $4.76.

The Federal Reserve has asked Goldman Sachs Group Inc. to work with JPMorgan Chase & Co. about a possible short-term loan to keep AIG in business, according to a person familiar with the request who could not speak publicly because talks were still ongoing. The loan could be for about $70 billion, the person said.

JPMorgan is a financial adviser for AIG. Calls to Goldman Sachs were not immediately returned. Treasury spokeswoman Brookly McLaughlin declined to comment when asked about the possible financing efforts.

New York Gov. David Paterson, meanwhile, stepped to the company's aid by saying the state will allow AIG to use $20 billion of assets held by its subsidiaries to provide cash needed to stay in business.

Paterson asked New York state insurance regulators to essentially allow New York-based AIG to provide a bridge loan to itself. The governor has also asked the head of New York's insurance department to talk with federal regulators about providing an additional bridge loan to AIG.

"AIG still remains financially sound," Paterson said.

The move will allow AIG to use those assets as collateral to borrow cash to fund its day-to-day operations, Paterson explained.

It also helps AIG by "giving them what they need most, which is time," said Keefe Bruyette & Woods analyst Cliff Gallant, who added that the relaxation of insurance regulations is "unprecedented."

Typically, a state insurance commissioner's priority is to protect the policyholder, and that includes making it very difficult for an insurer to access the funds that are used to pay claims.

AIG's chief executive, Robert Willumstad, who has been CEO since June, has indicated he is willing to shed some assets, saying about a month ago that a "less complex AIG would be a better competitor."

The Associated Press contributed to this report.