AIG Scrambles to Raise Cash, Talks to Fed Insurer Looks to
Sell Automotive Business, Annuities Unit

It Seeks $10 Billion in Fresh Capital as Downgrade Threatens

MATTHEW KARNITSCHNIG, LIAM PLEVEN & PETER LATTMAN
Wall Street Journal 15sep2008

Insurer American International Group Inc., succumbing to relentless investor pressure that drove its shares down 31% on Friday alone, is pulling together a survival plan that includes selling off some of its most valuable assets, raising more capital and possibly going to the Federal Reserve for help, people familiar with the situation said.

During a weekend scramble to shore up its finances, AIG turned down a capital infusion from a group of private-equity firms because it would have effectively given them control of the company, an 89-year-old giant that does business in nearly every corner of the world.

When AIG's board rejected the capital infusion, the company's recently appointed chairman and chief executive, Robert Willumstad, took the extraordinary step of reaching out to the Federal Reserve for help. The Fed usually deals with banks and brokers, and it wasn't clear what it could do. New York Federal Reserve President Timothy Geithner didn't respond to a request for comment and a company spokesman had no comment.

The assets AIG intends to sell include its domestic automotive business and its annuities unit, according to people familiar with the matter. It also looked into selling its aircraft-leasing arm, International Lease Finance Corp., but it isn't clear whether action on ILFC will be part of the emergency steps.

AIG also may shift assets from its regulated insurance business to its holding company, which would help the holding company respond to demands for cash or collateral.

The insurer, which has already raised $20 billion so far this year, was also trying to raise more than $10 billion in fresh capital, though it wasn't clear how it would do so. Taken together, the measures under consideration involved between $40 billion and $50 billion in capital raising and capital reallocation, the people said.

The rush for cash represents a remarkable comedown for AIG, whose role in global finance is in many ways as critical as investment banks such as Lehman Brothers. AIG's troubles were one of the subjects at the weekend meeting of Wall Street chiefs and regulators at the New York Fed.

Eric Dinallo, the insurance superintendent in AIG's home state of New York, took a significant role in the talks over the weekend, according to a person familiar with the matter. One key issue, the person said, was the proposed shift of assets. Insurers typically face stringent regulations on how they use their assets, as regulators seek to make sure that they can meet their obligations to policyholders.

The turmoil in housing and credit markets has hammered AIG, largely because of contracts it sold protecting others against losses tied to subprime loans and other risky assets. AIG's stock has fallen nearly 80% this year. It reported a second-quarter net loss of $5.36 billion last month after a first-quarter loss of $7.81 billion.

Among its challenges: It doesn't have access to the Fed's lending window, as some other troubled financial firms do. It could face significant claims from Hurricane Ike, which battered the Texas coast over the weekend. It had to pay a stiff premium in August when it borrowed money in the corporate bond market.

As recently as Thursday, AIG said it was sticking to a schedule to unveil its strategic plan on Sept. 25. But its shares fell 31% on Friday. Late that day, Standard & Poor's warned that it could cut AIG's credit rating by one to three notches, citing concerns that AIG would have difficulty raising capital. Such a step would make it more expensive for AIG to borrow and further undermine investor confidence in the company.

Earlier this year, AIG considered selling or spinning off ILFC, the aircraft-leasing arm, but it decided against the idea in June. Since then, AIG's position has deteriorated, making it more likely that it would try again to unload the unit.

AIG could also raise cash by selling its investments in Blackstone Group LP, which is also helping to advise the insurer on its restructuring. AIG owns a stake in Blackstone valued at about $700 million. It also has roughly $1 billion in investments in Blackstone's funds, according to regulatory filings, that it could sell in the secondary market.

It's not clear whether AIG has buyers lined up for any of the assets it wants to sell. Also unclear is how much interest private-equity firms would take in an AIG investment, and whether they have enough capital to make a dent in AIG's problems.

Over the weekend, one group of private-equity firms, including J.C. Flowers & Co., proposed a deal that AIG rejected right away because it would have effectively given the firms control. J.C. Flowers didn't respond to messages seeking comment.

"The numbers are too daunting," said a senior executive at a large private-equity firm. Given AIG's huge balance sheet, "we just don't have enough capital to fill the hole."

Over four decades, former Chief Executive Maurice R. "Hank" Greenberg built AIG into one of the world's largest financial firms. He traveled the globe in an effort to expand AIG's reach, notably in China. He made major acquisitions, and pushed AIG into new businesses beyond the world of traditional insurance. For years, investors paid a hefty premium to buy AIG shares.

Now it's not even the most valuable insurer in the U.S., as measured by market capitalization.

A 2005 accounting scandal precipitated Mr. Greenberg's departure. He has denied wrongdoing. A protégé, Martin Sullivan, ran the company until this summer when he was replaced under shareholder pressure with Mr. Willumstad, a former Citigroup Inc. executive who has been AIG's chairman since 2006.

When Mr. Willumstad said in June that he would release his turnaround plan in a few months, some wondered whether that gave him enough time to get his hands around such a multifaceted enterprise. But rapid shifts in the market have forced his hand.

The aircraft-leasing arm could be part of his efforts. Founded in 1973, ILFC boasts a fleet of more than 900 airplanes valued at more than $50 billion. It is the largest single customer for both Boeing Co. and European Aeronautic Defence & Space Co.'s Airbus. Given that ILFC logged record operating income of $352 million in the second quarter, its value may be relatively high at the moment compared to some other AIG units.

S&P said AIG had enough money to pay claims and post collateral, if needed -- an important statement, given that AIG could have to post billions of dollars if it got downgraded.

AIG had more than $1 trillion in assets at the end of the second quarter. Its shareholders equity -- assets minus liabilities -- stood at about $78 billion at that point.

source: 14sep2008