AIG Recovers Slightly on Possible Fed "Loan Package"

By , Money Morning •

By Jennifer Yousfi
Managing Editor

Shares of American International Group, Inc. (AIG) recovered slightly yesterday (Tuesday) from an early morning plunge as the U.S. Federal Reserve reconsidered a bridge loan to the troubled insurer. 

At 11:30 a.m. EDT, AIG shares were trading at $2.53, down $2.23 (more than 40%) after earlier hitting a new 52-week low of $1.25. But reports that the Fed might step in with an emergency loan allowed AIG stock to pare some of the losses and close at $3.95, down 17% with a decline of 81 cents for the day.

Today’s decline followed on the heels of Monday’s 60% drop. AIG stock has traded as high as $70.13 in the past 12 months, but the insurer’s shares are down over 93% year-to-date.

AIG’s waning capital position became more perilous late Monday night, when all three major ratings agencies – Standard & Poor's, Moody's Investors Services (MCO) and Fitch Ratings Inc. – downgraded AIG stock at least two levels on its current liquidity crisis late Monday night. The cuts require AIG to post an additional $13 billion in collateral to secure its portfolio.

If AIG can’t come up with the needed cash, it will effectively be out of business.

Timing is critical, as AIG has, at most, “a day” to solve its problems, New York Gov. David Paterson said in an interview with CNBC television.

Citing an unnamed source familiar with the negotiations, Bloomberg News reported that the Fed was considering extending a “loan package” to the distressed insurance firm.

“To the extent that a bridge loan or some type of liquidity provision allows AIG time to sell some assets on its balance sheet and time to maintain it's investment-grade rating at A or higher, I think it's a good move,” Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co. LLC, better known as PIMCO, said in a Bloomberg TV interview.

BusinessWeek estimates that AIG underwrote $79 billion in subprime mortgage-backed collateralized debt obligations (CDOs) for firms such as Merrill Lynch & Co. Inc. (MER). A collapse of AIG could have far-reaching effects in the already troubled financial sector.

News and Related Story Links:

  • The Associated Press:
    AIG shares sink as it tries to shore up books