Risk Management

AIG’s Fate Hanging in the Balance

Credit Suisse sees a "heightened probability" of bankruptcy for the insurance giant, although predictions remain mixed.
Stephen TaubSeptember 16, 2008

Fueling more speculation about a cruel fate for embattled American International Group, Credit Suisse securities analyst Thomas Gallagher warned in a note to clients that there is a “heightened probability of a potential bankruptcy filing” by the giant holding company for insurance and other businesses.

The report followed the announcement that Standard & Poor’s is lowering the AIG debt rating by three notches, from AA- to A-, and its insurance financial strength ratings by three notches, from AA+ to A+. Gallagher said that there is a chance that the company can work its way through its liquidity crisis if it can secure substantial bridge financing. But, he added, this will be challenging to execute in the current onerous credit environment.

Credit Suisse said the combination of its downgrades — Moody’s also cut its debt ratings by two notches — will require collateral postings of at least $14.5 billion. It also said that negative marks at AIG Financial Products, which manages AIG’s credit- default-swaps-portfolio, would require another $5 billion to $10 billion of collateral postings this quarter, pushing the total to $20 billion to $25 billion.

“Ironically, the weakening of its credit spreads and ratings could make it easier for AIGFP to attempt to commute its [credit-default swaps] on CDOs, but the large number of contracts and counterparties would likely make this a cumbersome and lengthy process, perhaps providing some moderate but not substantial near term relief,” said Gallagher, in his report.

On Monday, AIG’s fate was the third element driving investor concerns, as they were preoccupied more by the failure of Lehman Brothers Holdings and the sale of Merrill Lynch to Bank of America. But AIG’s unresolved status moved it up a notch among worries today.

The stock market continued extremely nervous over AIG’s prospects. Its shares had tumbled another 44 percent by midday Tuesday, after plunging 62 percent on Monday.

The overall market briefly rallied during the morning, when CNBC reported that the government might be willing to bail out the insurance giant. But later, Treasury Secretary Henry Paulson said he opposed using government money and that a private sector solution wasn’t likely, according to Reuters.

Meanwhile, former AIG Chairman Maurice “Hank” Greenberg said in a CNBC interview: “It’s in our national interest that AIG survive.” He told Maria Bartiromo there could be “systemic risks” if AIG’s trading partners try to get out of their contracts, the wire service noted.