AIG on the hook for another $14.5 billion on credit rating cuts

AIG continues to get hammered as they face continued credit rating downgrades. The stock is off another 15% today.  The recent downgrades mean that the battered company may need an additional $14.5 billion in collateral to meet its obligations.  Additionally, the $20 billion promised to the company by the NY Deptartment of Insurance won’t be available until a “broader deal” is secured to prop up the company.

This reminds me of a post we did about the mortgage bond insurers (referring to AMBAC and MBIA) back in the day and this choice quote from none other than Warren Buffett:

As Warren Buffett says about the problems with bond insurers’ business models:

“We see a Baa credit enhanced to a Aaa credit by someone guaranteeing it for a 10-15 basis point charge. Yet, the spread in the market yield might be 100 basis points. Well, that doesn’t strike us as smart. “¦ I would say that at some point, you can get into a lot of trouble at 140-to-1 insuring credits.”

That some point is now, Warren.

From Market Watch:

In a filing to the Securities and Exchange Commission last month, AIG spelled out precisely what those downgrades would mean: Counterparties could ask for another $14.5 billion in collateral. It also gives them the right to terminate contracts, though AIG at the time said it’s “unlikely” contracts would be terminated given the profits they would forfeit.

The downgrades also may trigger an exodus of clients, with some customers canceling policies. That may require AIG, a component of the Dow Jones Industrial Average, to return any unearned premiums covering the rest of 2008.

As with Lehman Brothers, the federal government has been reluctant to come to its rescue. However, the Federal Reserve has asked Goldman Sachs to lead a lending facility for AIG of between $70 billion and $75 billion, according to two people familiar with the situation.

Standard & Poor’s lowered its rating on AIG to A- from AA-, and Moody’s Investors Service cut its rating to A2 from Aa3. Fitch Ratings and AM Best also downgraded AIG.

“The main reason for the rating actions is the combination of reduced flexibility in meeting additional collateral needs and concerns over increasing residential mortgage-related losses,” said Standard & Poor’s credit analyst Rodney A. Clark in a statement.

S&P said the move by the New York Department of Insurance to permit some of AIG’s regulated insurance subsidiaries to provide the parent with $20 billion of liquid investments wasn’t enough.

American International Group Inc., the largest U.S. insurer by assets, hasn’t gotten access to a $20 billion lifeline announced yesterday by New York Governor David Paterson.

“They don’t have that $20 billion” yet, said David Neustadt, a spokesman for New York Insurance Superintendent Eric Dinallo, in an interview today. “It would be part of a broader deal. If there’s no broader deal, then it doesn’t happen.”

And we’re not even done yet!!!

Share This

This post was found on BlownMortgage
Follow the link to get to the orginal message.