Shares of American International Group Inc. fell Tuesday as investors questioned whether the huge insurer would come up with more money to stay in business and avoid igniting even more global financial turmoil.
AIG is looking for financing to help stave off a liquidity shortfall. The New York Fed is involved in talks regarding AIG, a person with knowledge of the matter said. The person asked not to be identified by name because the talks are ongoing.
Treasury spokeswoman Brookly McLaughlin said that Treasury officials remained focused on market developments but she refused to comment on the AIG report.
Federal Reserve spokeswoman Michelle Smith said she could not make any comment on the report that the government will supply money to support AIG.
AIG shares were down $1.56, or 32.7 percent, to $3.20 in afternoon trading, rebounding from an intraday low of $1.25 but below the day’s high of $4.57. Shares have traded as high as $70.13 during the past year.
New York-based AIG operates a range of insurance and financial services businesses ranging from property, casualty, auto and life insurance to annuity and investment services. Those operations are considered healthy and policyholders would likely be covered even if AIG were to file for bankruptcy protection, said Donald Light, a senior analyst with Celent.
The problems at AIG stem from the more exotic financial products it offers, including some that insure risky debt and bonds against default. The value of those products have deteriorated amid the downturn in the credit markets over the past year.
Late Monday night, all three major agencies — Standard & Poor’s, Moody’s Investors Services and Fitch Ratings — cut AIG’s ratings at least two notches. While the new ratings are all still considered investment grade, the downgrades add to the pressure on AIG as it seeks tens of billions of dollars to strengthen its balance sheet.
“Getting some kind of liquidity facility in the next couple of days will help confidence,” Rodney Clark, a credit analyst at S&P, said in an interview.
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.
“While there is a chance the company can work its way through its liquidity problems if it can secure substantial bridge financing, we think this will be challenging to execute it in the current onerous credit environment,” Credit Suisse analyst Thomas Gallagher wrote in a research note to clients.
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.
For the three quarters ended in June, AIG lost about $25 billion in the value of credit default swaps.
In its efforts to improve its liquidity, AIG has already received support from the New York governor and state’s insurance regulator. On Monday, Gov. David Paterson and state regulators approved a measure that allows 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.
That $20 billion in support though is unlikely to be nearly enough to help AIG.
S&P’s Clark said the financing facility agreed upon with New York regulators is a “helpful starting point,” but AIG will “definitely need added capital and liquidity.”
The Fed on Monday asked Goldman Sachs Group Inc. to work with JPMorgan Chase & Co. about a possible short-term loan to keep AIG in business, said 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.
Tuesday morning, while announcing fiscal third-quarter earnings, Goldman Sachs Chief Financial Officer David Viniar said during a conference call that he was “not going to comment on rumors about where we are in helping AIG.” He said they are “good important clients” but refused to discuss the matter further.