CHARLOTTE, N.C. American International Group Inc. will be allowed to use $20 billion of assets held by its subsidiaries to provide cash needed for the troubled insurer to stay in business, New York Gov. David Paterson said Monday.
The move comes as AIG continues to review its operations and discuss alternatives with outside parties, reportedly including Warren Buffett's Berkshire Hathaway Inc., to improve its business amid concern the world's largest insurer could need up to $40 billion to shore up its balance sheet.
Paterson asked New York state insurance regulators to essentially allow AIG to provide a bridge loan to itself. The governor has also asked the head of New York's insurance department to talk with federal regulators about providing an additional bridge loan to AIG.
"AIG still remains financially sound," Paterson said.
The move will allow AIG to use those assets as collateral to borrow cash to fund its day-to-day operations, Paterson explained.
AIG has been battered over the past year by billions of dollars of losses tied to deterioration in the mortgage and credit markets.
Shares of AIG once the world's most valuable insurer by market value fell $5.82, or 47.9 percent, to $6.32 in afternoon trading. They had been down as much as 71 percent to $3.50 before Paterson's comments.
According to news reports, New York-based AIG was seeking $40 billion in emergency funds possibly from the Federal Reserve to help the insurer avoid a credit rating downgrade, which would make it more expensive for AIG to raise money. AIG has already raised $20 billion in new capital this year.
Also, the insurer was said to be in "rescue" talks with Buffett.
Berkshire Hathaway spokeswoman Jackie Wilson said Buffett was not available Monday to comment on the AIG-rescue reports. Typically, Berkshire does not comment on any deals before they are completed.
On Friday, Standard & Poor's warned that it could cut AIG's credit rating by one to three notches because of concerns that AIG will have difficulty accessing capital in the short term.
AIG is in a precarious position, in part, because of a potential downgrade to its credit ratings and how that would affect its portfolio of financial instruments known as credit default swaps. The swaps are essentially insurance coverage to protect investors against defaulting bonds or debt.
For the three quarters ended in June, AIG lost about $25 billion in the value of credit default swaps and about $15 billion on other investments, such as mortgage-backed securities, which are bonds backed by a pool of mortgages.
As a seller of the swaps, investors go to AIG to insure bonds or debt they hold. As part of those swaps, AIG must maintain certain credit ratings. If AIG's ratings are cut, the insurer must put up more collateral or repay the contracts.
"The concern (with AIG) is the contractual effects" if ratings are cut, said Len Blum, managing director at investment bank Westwood Capital.
The credit ratings clause is essentially a hedge against failure by AIG to pay out any claims on the swaps.
As of July 31, AIG estimated a one-notch downgrade by both S&P and Moody's Investors Service would force it to post $13.3 billion in extra collateral to cover contracts such as credit default swaps, according to a regulatory filing.
The potential need for that extra capital puts a constraint on AIG's day-to-day liquidity position, which is why it has been seeking new financing or capital investments.
"Liquidity is clearly under pressure now with over $13 billion of additional collateral posting requiried for (the company) in the event of a ratings downgrade," Credit Suisse analyst Thomas Gallagher wrote in a research note.
AIG had worked with New York officials through the weekend to shore up capital after rating agencies threatened downgrades.
AIG has said it is exploring all options to help bolster a balance sheet battered by a downturn in the credit and mortgage markets. Those losses over the past year have come amid a sharp increase in defaults among mortgages. As mortgages have increasingly defaulted, investors have worried that bonds backed by the troubled loans would also default, driving their prices down. That has forced companies like AIG to slash their value.
"It's not like they have excessive claims," said Tony Plath, an associate professor of finance at the University of North Carolina at Charlotte. "What's going on is the same thing that's going on in the banking industry. They are writing down their assets because they've got assets that are not worth what their balance sheet says they're worth."
Calls made Monday to AIG were not immediately returned.
AIG's chief executive, Robert Willumstad, who has been CEO since June, was expected to announce a turnaround plan Monday, possibly involving the disposal of major assets including its domestic automotive business and its annuities unit, The Wall Street Journal reported, citing unidentified people. Also possibly up for sale is the company's aircraft-leasing business.
The need for action was likely exacerbated by the plunge in AIG's stock, which tumbled more than 30 percent on Friday alone and 45 percent last week amid concerns in the financial sector.
Willumstad has indicated he was willing to shed some assets, saying about a month ago that a "less complex AIG would be a better competitor."
"We're assessing all of our businesses and looking at options for how AIG ought to compete in the future, what kind of businesses we ought to be in," said AIG spokesman Nicholas Ashooh Sunday night.
AIG operates a range of insurance and financial services businesses ranging from property, casualty, auto and life insurance to annuity and investment services.
New York-based AIG turned down a capital infusion from a group of private-equity firms because it would have effectively given them control of the company, the Journal reported Monday.
The developments come as investment bank Lehman Brothers Holdings Inc. filed for bankruptcy early Monday, and news that Bank of America Corp. was buying Merrill Lynch & Co. in an all-stock deal worth about $50 billion.
Also, U.S. and foreign banks were joining forces to create a plan aimed at restoring confidence in the banking system, which has been weakening over the past year after a sharp rise in mortgage defaults set off deterioration in the broader credit markets.
"We believe AIG will survive, but we have little indication of how many business lines will ultimately need to be sold and how dilutive to shareholders' future capital raising efforts will be," wrote Citi Investment Research analyst Joshua Shanker in a note to clients.AIG's aircraft-leasing arm, International Lease Finance Corp., posted record results in the second quarter. As recently as June, AIG considered shedding ILFC, a company founded in 1973 that has a fleet of more than 900 airplanes valued at more than $50 billion. But newly appointed Willumstad said after reviewing ILFC's business, "ILFC should be a part of the AIG portfolio." ILFC primarily leases aircraft from Boeing Co. and Europe's Airbus to major airlines and had net income of more than $200 million in the second quarter.
AP Business Writer Stephen Bernard reported from New York. AP Business Writer Josh Funk in Omaha, Neb., contributed to this story.