AIG shares slumped 46% to $2.03 during evening action, after dropping 21% in regular trading. Credit default swaps spreads on the insurer's debt widened dramatically by roughly 2,200 basis points to 5,508 suggesting traders are pricing in the potential demise of the company.
New York Gov. David Paterson, who oversees AIG's main regulator, said early Tuesday that the insurer had a day to shore up its finances, stressing that a collapse of the New York-based company would be "catastrophic."
"The market leader is in trouble," said Andy Barile, an independent insurance industry consultant based in Rancho Santa Fe, Calif. "There must be something that can be done to stop this. There are too many financial consequences."
Officials from the Treasury Department, the Federal Reserve and the New York State Insurance Department met at the Federal Reserve Bank of New York with AIG and representatives from other leading financial institutions to discuss possible solutions to the insurer's predicament, according to a Fed spokesman. He declined to comment further.
The Fed is considering some sort of financial support for AIG, the Wall Street Journal reported, citing a person familiar with the situation.
However, by 6.50 p.m. ET on Tuesday, no plans had been announced.
AIG said late Tuesday that it's working on ways to increase short-term liquidity at its parent company. The insurer said it won't reduce capital at any of its subsidiaries or tap into Asian operations for liquidity.
In an extraordinary turn, the Federal Reserve agreed Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan.
The Federal Reserve and Goldman Sachs and JPMorgan Chase had been trying to arrange a $75 billion loan for the company to stave off the financial crisis caused by complex debt securities and credit default swaps. The Federal Reserve stepped in after it became clear Tuesday afternoon that the banking consortium would not be able to complete the deal.
Without the help, A.I.G. was expected to be forced to file for bankruptcy protection.
The need for the loans became necessary after the major credit ratings agencies downgraded A.I.G. late Monday, a move that likely to have forced the company to turn over billions of dollars in collateral to its derivatives trading partners worsening its financial health.
Until this week, it would have been unthinkable for the Federal Reserve to bail out an insurance company, and A.I.G.’s request for help from the Fed of just a few days ago was rebuffed.
But with the prospect of a giant bankruptcy looming — one with unpredictable consequences for the world financial system — the Fed abandoned precedent and agreed to let the money flow.
parvus wrote:Sorta.* Just about every financial firm is a counterparty to just about every other one.
*Some may call it musical chairs, though it need not be treated as such.
But even more important, they have large numbers of voters who are policy holders and there's an election on. How many retail depositors did Lehman have? Zero.This was a large insurance company. They have smart well paid people
Goofyboy wrote:They have smart well paid people who's sole job is to hire very smart well paid people who sit around all day thinking about odds and catastrophes and risk and long tails and orange swans with bright purple dots. How did they manage to get to this point?
While I'm sure there is lots more 'excitement' on the way, I think we'll see a considerable rise in stock prices tomorrow and perhaps beyond, maybe even AIG's.
The markets are inundated with zombie myths. No matter how many times you stab them through the heart, you just can't kill them.
What's taking down these grand financial icons such as Lehman and A.I.G.? It couldn't possibly be that the companies themselves made stupid and shortsighted decisions. So it must be a conspiracy of the short-sellers. It must be some wrong-headed accounting rules and bad regulation.
In the wake of the demise of A.I.G., we are hearing them again. If only the insurer didn't have to mark its positions to market, this foolishness would have been avoided and we'd all be celebrating how wonderful the economy is. The S.E.C. has rushed to put up restrictions against short-selling again.
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