AIG havoc
By Tony Munroe
HONG KONG (Reuters) – American International Group Inc, thrown a $20 billion lifeline by New York state officials, came under fresh pressure for survival on Tuesday as ratings agencies downgraded the insurer’s debt and the global financial sector meltdown spread.
Asian markets, many of them closed for a holiday on Monday, tumbled as investors absorbed the weekend’s dramatic events on Wall Street, where Lehman Brothers (LEH.P) filed for bankruptcy protection and rival Merrill Lynch (MER.N) agreed to be sold to Bank of America (BAC.N) for $50 billion.
Shares in AIG (AIG.N) plunged nearly 61 percent on Monday and the U.S. Federal Reserve hired investment bank Morgan Stanley (MS.N) to review options for what was once the world’s biggest insurer — which has lost 92 percent of its value this year — a person familiar with the situation said on Monday.
British bank Barclays Plc (BARC.L), which over the weekend pulled out of rescue talks for Lehman, was reported by the Wall Street Journal to be in talks to buy large portions of Lehman.
“We do not comment on market rumors,” said Angie Tang, a Barclays spokeswoman in Hong Kong.
AIG’s ratings downgrade could force it to post more collateral and nullify insurance contracts, possibly setting in motion a chain reaction that could threaten its survival.
“While regulators allowed it to tap its subsidiaries for cash, this will not suffice beyond the short term, and its troubles risk losses for its counterparties,” Dariusz Kowalczyk, chief investment strategist at CFC Seymour in Hong Kong, wrote in a research note.
Top U.S. savings and loan institution Washington Mutual Inc (WM.N) saw its rating cut to “junk” status by Standard & Poor’s amid concerns about mortgage losses, causing its shares to slide in after-hours trading after a 27 percent drop in the regular session.
EYES ON AIG
Moody’s Investors Service cut AIG’s rating to A2 from Aa3, a two-notch downgrade. S&P lowered the rating to A-minus from AA-minus, a three-peg reduction, and Fitch Ratings reduced its standing to A from AA-minus, a two-notch cut.
AIG’s ratings are still investment grade, although all three agencies said more downgrades could follow.
“AIG seems to be the next guy on the chopping block,” said Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey.
Again seeking a private solution to Wall Street’s woes, the Fed had asked JPMorgan Chase & Co (JPM.N) and Goldman Sachs Group Inc (GS.N) to explore arranging $70-$75 billion in loans to support AIG, among other financing options, another person familiar with the situation said.
AIG turned to the Fed late on Sunday after failed talks with several buyout firms and Warren Buffett’s Berkshire Hathaway (BRKa.N). The company has also said it was exploring asset sales.
MARKETS TUMBLE
Asian stocks tumbled across the board, with Tokyo (.N225) down more than 5 percent at a three-year low. Japanese government bond futures jumped by their daily limit of three full points as investors fled to safe havens, while Japan’s central bank said it would strive to maintain stability in financial markets.
Hong Kong’s Hang Seng Index (.HSI) was off nearly 7 percent, while Seoul’s main index (.KS11) dropped more than 6 percent.
“The second leg of the subprime crisis has begun,” Jun Kwang-woo, head of South Korea’s Financial Services Commission told reporters. “It could be painful but a recovery, once in place, may be rapid.”
U.S. stocks tumbled on Monday, with the Dow Jones industrial average (.DJI) dropping more than 500 points, or 4.4 percent, as Wall Street had its worst day since markets reopened after the September 2001 attacks.
There was speculation that Wall Street’s worsening meltdown could prompt the Fed to act. U.S. short-term interest rate futures rose sharply on Monday, reflecting the higher prospects for a rate cut at or before Tuesday’s Federal Reserve meeting.
The iTRAXX Asia ex-Japan high-yield index, a key measure of risk aversion, widened by over 50 basis points from Monday’s levels to a record 700/750 bps. The equivalent investment -grade index widened by 20 bps to 195/210 bps, also a record.
Darkening one of the few bright spots from the weekend’s mayhem, Bank of America — which would surpass Citigroup Inc (C.N) as the country’s largest bank by assets with the planned takeover of Merrill — saw its shares plunge by 21 percent.
“The concern for Bank of America is the debt that they are acquiring,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.
“Secondly, is it too big a purchase? They are dealing with Countrywide right now. Did they need to be dealing with this as well? There’s some concern they might have bit more than they could chew.”
The state of New York, where AIG is based, did its best to bolster the stricken insurer with a complex asset swap giving it a $20 billion lifeline, but its longer-term rescue depended on additional funding.
The cost to insure the debt of AIG also surged on Monday. AIG’s credit default swaps jumped to 33.5 percent of the sum insured paid upfront, plus annual premiums of 5 percent for five years, from 13 percent upfront on Friday, according to Markit Intraday.
