American International Group Inc. will be allowed to use $20 billion of assets held by its subsidiaries to provide cash needed for the troubled insurer to stay in business, New York Gov. David Paterson said Monday.
The move comes as AIG reviews its operations and discusses alternatives with outside parties, reportedly including Warren Buffett’s Berkshire Hathaway Inc., to shore up its business amid concern the world’s largest insurer could need billions of dollars to strengthen its balance sheet.
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 could face significant claims from Hurricanes Ike and Gustav, which have battered the Gulf Coast. But “AIG is a big company, and I would expect they will be able to meet their claims,” Gallant said.
“Those events do not cause an immediate cash problem for the company,” he added.
If an insurer cannot pay its claims, the state’s insurance fund, which is backed by other insurance companies that do business in the state, would help pay off policyholders.
“If anyone’s been put at risk, it’s the other insurance companies who do business in the state,” Gallant said.
AIG has been battered over the past year by billions of dollars of losses tied to deterioration in the mortgage and credit markets.
Shares of AIG fell $7.38, or 60.8 percent, to close at $4.76 Monday. They had been down as much as 71 percent to $3.50 before Paterson’s comments.
The Fed has 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.
JPMorgan is a financial advisor for AIG.
Calls to Goldman Sachs were not immediately returned.
Treasury spokeswoman Brookly McLaughlin declined to comment when asked about the possible financing efforts.
Also, the insurer was said to be in “rescue” talks with Buffett.
Berkshire Hathaway spokeswoman Jackie Wilson said Buffett was not available Monday to comment on the AIG-rescue reports. Typically, Berkshire does not comment on any deals before they are completed.
On Friday, Standard & Poor’s warned that it could cut AIG’s credit rating by one to three notches because of concerns that AIG will have difficulty accessing capital in the short term.
AIG is in a precarious position, in part, because of a potential downgrade to 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.
As a seller of the swaps, investors go to AIG to insure bonds or debt they hold. As part of those swaps, AIG must maintain certain credit ratings. If AIG’s ratings are cut, the insurer must put up more collateral or repay the contracts. The credit ratings clause is essentially a hedge against failure by AIG to pay out any claims on the swaps.
AIG estimated a one-notch downgrade by both S&P and Moody’s Investors Service would force it to post $13.3 billion in extra collateral to cover swaps, according to a regulatory filing.
The potential need for that extra capital puts a constraint on AIG’s day-to-day liquidity position, which is why it has been seeking new financing or capital investments.
AIG had worked with New York officials through the weekend to shore up capital after rating agencies threatened downgrades. AIG has said it is exploring all options to help bolster a balance sheet battered by a downturn in the credit and mortgage markets.
“It’s not like they have excessive claims,” said Tony Plath, an associate professor of finance at the University of North Carolina at Charlotte. “What’s going on is the same thing that’s going on in the banking industry. They are writing down their assets because they’ve got assets that are not worth what their balance sheet says they’re worth.”
Calls made Monday to AIG were not immediately returned.
AIG’s chief executive, Robert Willumstad, who has been CEO since June, was expected to announce a turnaround plan Monday, possibly involving the disposal of major assets including its domestic automotive business and its annuities unit, the Journal reported, citing unidentified people. Also possibly up for sale is the company’s aircraft-leasing business.
Willumstad has indicated he was willing to shed some assets, saying about a month ago that a “less complex AIG would be a better competitor.”
“We’re assessing all of our businesses and looking at options for how AIG ought to compete in the future, what kind of businesses we ought to be in,” said AIG spokesman Nicholas Ashooh Sunday night.
AIG’s aircraft-leasing arm, International Lease Finance Corp., posted record results in the second quarter. As recently as June, AIG considered shedding ILFC, a company founded in 1973 that has a fleet of more than 900 airplanes valued at more than $50 billion.