Federal Reserve officials were in urgent talks with Goldman Sachs and JPMorgan Chase yesterday to put together a $75 billion lending facility to stave off a crisis at the American International Group, the latest financial services company to be pummeled by the turmoil in the housing and credit markets.
Shares in AIG tumbled more than 60 percent yesterday as concerns grew that it lacked capital to withstand cuts to its debt rating, which appeared imminent. The company's potential write-offs are mounting and could reach $60 billion to $70 billion, according to two people briefed on the situation.
The day started off with news that AIG had requested a $40 billion bridge loan from the Fed, a request that was rebuffed, and ended with the word that its need had soared to $75 billion. The firm suffered several ancillary credit-rating downgrades during the day, but as of last night it had not seen its main debt ratings cut by Standard & Poor's or Moody's.
The complex discussions, continuing into the night as a deal was hoped for before U.S. markets opened today, involved New York state and federal regulators, private equity firms and Wall Street banks that rely on AIG's ability to honor its derivatives contracts, as they do with Lehman Brothers.
"It's not just the failure of one company," said Julie A. Grandstaff, vice president and managing director of StanCorp Investment Advisers. "It's the ripple effect of the disappearance of counterparties" that spurred urgent rescue efforts.
The need to find fresh money for AIG is bringing new layers of complexity to the credit crisis. As an insurance concern, AIG has wholly different regulators and capital requirements than the banks and Wall Street firms that have suffered most of the huge losses so far. The Fed was not able to provide the $40 billion bridge loan because it oversees banks, not insurers.
The talks about backing up AIG began last week, when the company approached regulators, saying it was concerned that if a deal could not be put together to save Lehman, AIG's own future would be in doubt. The talks led to the announcement at a midday news conference by New York Gov. David A. Paterson that the state would allow AIG to borrow $20 billion from its own subsidiaries, to help bolster its capital in the face of potentially disastrous credit downgrades.
Normally, state insurance regulations would prevent a holding company like AIG from pulling assets out of subsidiaries, which are insurance companies that need sufficient liquid resources to pay claims.
But Paterson said the situation was dire.
"I hope you're aware of the risks if we don't act," he told journalists at the news conference. "It is a systemic problem."