New York State offers lifeline to insurance giant AIG

NEW YORK: Governor David Paterson of New York said on Monday that the state would allow the American International Group, one of the world's largest insurance companies, to lend itself $20 billion to bolster its capital as it faces potentially disastrous credit downgrades.

Shares in AIG tumbled more than 60 percent early Monday as investors grew concerned that the firm lacked capital to withstand cuts to its debt rating. But Paterson reiterated the state's support of the company and declared AIG "financially sound."

The company approached the state for help, Paterson said, and government officials worked closely with AIG throughout the weekend. He vocally supported AIG's efforts to seek help from the Federal Reserve.

AIG has sought a $40 billion bridge loan from the Federal Reserve as a lifeline, as the three-part rescue plan it had devised appeared to crumble, a person briefed on the matter said.

Paterson argued that New York taxpayers would not be put at risk by the state's involvement.

The announcement appeared to help arrest the decline in AIG's stock. Trading below $4 shortly before noon, the shares recovered to about $6 in the following half-hour - still a loss of almost 50 percent from their Friday close.

Ratings agencies had threatened to downgrade the insurance giant's credit rating by Monday morning, allowing counter-parties to withdraw capital from their contracts with the company. One person close to the firm said that if such an event occurred, AIG might survive for only 48 hours to 72 hours.

AIG has already raised $20 billion this year. But even that amount of capital has not averted a crisis.

The firm's sickly financial health was a prominent topic in weekend talks among Wall Street chieftains who gathered at the Federal Reserve Bank of New York to discuss the potential collapse of the investment bank Lehman Brothers. AIG had become one of the biggest underwriters of complex debt securities known credit default swaps, used as insurance for a wide range of products, including the mortgage instruments that have been the bane of Wall Street for the past year and a half.

Eric Dinallo, the New York state insurance superintendent, has been deeply involved in discussions about AIG's survival, this person said.

J. C. Flowers & Company, a buyout firm focused on financial services firms, offered $8 billion for a stake in the business that would have given it an option to buy all of AIG down the road. Kohlberg Kravis Roberts and TPG also said they would bid. But all three withdrew at the last minute, citing the company's precarious financial health.

AIG's extraordinary move of reaching out to the Fed for help may spur other nonbank lenders. Companies ranging from General Electric to GMAC have been hurting and would desperately love the liquidity that the Fed would provide.

Yet it is not clear whether the Fed would acquiesce to AIG's request.

Before seeking a lifeline, the firm had earlier been reported to be interested in selling its aircraft leasing business, the International Lease Finance Corporation. Founded in 1973, the business has nearly 1,000 planes in its fleet. But people briefed on the matter said that unit bore special tax advantages that AIG had decided would be lost on any other owner.

AIG's problems are not new. The company lost $13.2 billion in the first six months of 2008, largely owing to declining values in mortgage-related securities held in its investment portfolio and collateralized debt obligations it owns.

But the company's outlook grew grimmer last week when Standard & Poor's warned that it was considering downgrading the company's debt as a result of further write-downs it might have to take.

As the credit storm has raged in recent months, insurance companies like AIG have been better positioned than banks and brokerage firms to weather it because accounting rules do not require insurers to mark the investments held in their long-term portfolios to market. Insurance companies like AIG can hold their investments until they mature, riding out the ups and downs in the market for those assets.

But the moment it began trying to raise capital, AIG had to open its books to potential investors who were likely to take a sharp pencil to the company's portfolio values, analysts said.