AIG Facing Liquidity Crisis, Seeks $40 Billion Loan from Federal Reserve

Insurer American International Group Inc., working to stave off rating downgrades [See related article] and shore up the capital of its holding company, has made an unprecedented approach to the Federal Reserve seeking $40 billion in short-term financing, the New York Times said.

Chief Executive Robert Willumstad reached out to the Fed late on Sunday, according to reports in the Times, the Wall Street Journal and business news channel CNBC.

AIG’s scramble to secure a Fed lifeline came late into one of the worst-ever days on Wall Street, with Lehman Bros on the verge of collapse, and Bank of America moving to takeover Merrill Lynch & Co.

The Fed normally oversees monetary policy and supervision of banks, but CNBC said AIG was seeking the funds as a temporary measure and planned to repay the Fed with the proceeds from asset sales.

Rating agencies have threatened to downgrade AIG’s ratings by Monday morning, said the New York Times.

AIG officials did not immediately respond to requests for comment.

The company, until recently the world’s biggest insurer by market capitalization, has been attempting to hammer out an emergency strategic plan after its shares fell nearly 50 percent last week on fears it faced a liquidity crisis.

AIG has been negotiating with various parties including officials from the New York Insurance Department and private equity firms as it seeks ways to free up capital, raise new capital and protect policyholders.

Regulators including New York Insurance Superintendent Eric Dinallo have been holed up at AIG’s New York offices over the past two days trying to hammer out a plan.

“We are working to craft a solution to protect the company and policyholders,” said a person from the New York Insurance Department, who asked not to be named.

Former AIG CEO Maurice “Hank” Greenberg, who ran the company for nearly four decades, was not involved in any of the discussions, said his spokesman, Glen Rochkind.

“He repeatedly offered to assist in any way he could,” added Rochkind.

Cash Crunch
AIG, hit by $18 billion in losses over the past three quarters from guarantees it wrote on mortgage derivatives, has had to act quickly after Standard & Poor’s said on Friday it may downgrade AIG’s ratings.

Ratings downgrades could force AIG to post up to $14.5 billion more in collateral, according to a regulatory filing last month.

Downgrades could also be detrimental to AIG’s insurance business, since some policies carry clauses that nullify a contract in the event of downgrades below a certain level.

Over the weekend, the insurer has been working on a three-part plan involving asset sales, shifting regulated capital from the insurance operations to the holding company, and working with private equity investors, said a person familiar with the negotiations.

The New York Times said AIG’s plans to shift capital had to be put on ice because of the time and complexity involved, and that private equity firms withdrew interest over the company’s precarious financial health.

Parties in capital-raising talks with AIG included buyout firms Kohlberg Kravis Roberts & Co. and J.C. Flowers & Co., another person familiar with the talks said.

An AIG spokesman earlier confirmed the company was evaluating a wide range of options, including asset sales.

Media reports have said that one of the companies on the block was AIG’s highly profitable aircraft leasing arm, but the spokesman declined to confirm this was the case.

In late June, AIG said the unit, International Lease Finance Corp., would remain part of AIG.

AIG was founded in China 89 years ago. In the years since, largely under Greenberg’s watch, it grew into one of the world’s largest insurers, spanning 130 countries and territories and serving 74 million customers.

Greenberg stepped down in 2005, in the midst of an accounting scandal. His successor, Martin Sullivan, was replaced by Willumstad in June after investors grew disgruntled over its three quarters of losses.

Greenberg owns or controls about 12 percent of AIG’s stock, making him the largest shareholder.