The U.S. Federal Reserve has thrown AIG an $85 billion lifeline at the last minute. It’s an unprecedented move for the Fed, who will take over 79.9% of AIG’s equity. The move was made to avert a wholesale global financial meltdown.
Meanwhile, there have been no updates from AIG United Guaranty Canada, AIG’s Canadian mortgage default insurer. AIG, the parent, will soon be repositioning much of its capital and getting rid of many of its assets. Hopefully AIGUG isn’t one of them.
AIG under US government control will not be insuring Canadian high risk mortgages.
You can pretty much bank on it.
The US Government is not in “control” it has merely made a loan (albeit a sizable one) AIG is still a very profitable business and will likely continue to do so.
Actually, the US Government most certainly is in control.
It now owns an 80% equity stake in the company.
Furthermore, if you look at AIG’s present market capitalization (less than $10billion), and contrast that with its $1 trillion of assets, even a small depreciation/devaluation of its assets will wipe out any remaining market cap.
Practically speaking, we must surely assume that AIG’s staff have valued its own assets in the most flattering light possible for as long as they were able to do so in an effort to avoid recent events.
Also, AIG still faces additional billions of claims from its role in insuring various CDS policies above the $25b already paid.
The core businesses of AIG (ie tradional insurance) are indeed profitable and will be sold off and continue to operate.
However, AIG as a parent company corporate entity is finished. The only question is how much (if any!) of the $85b loan is ultimately repaid to the US Government.
AIG does not insure high risk mortgages in Canada. This is not an issue.
AIG Canada is one of the most secure investments in the AIG universe with strong Canadian government guarantees behind it. If the US government managed its mortgage industry the way that the Canadian government has, the US wouldn’t be in the total mess that it is…
Both McCain and Obama are promising to increase regulation of the financial services industry after this mess…. sounds all too familiar… the leaders promised the same after the Savings and Loan screw up… leading to this???
I think it is unlikely that the US government will make sensible changes in the rules… in an environment with such strong state rights… including the right for any state to make stupid.
Regardless of how well AIG’s Canadian operations are performing, they will still likely be sold. Here’s why.
AIG needs to raise money fast because the rate of interest on the $85 billion it has borrowed from the Fed is almost criminal – 850 bps above LIBOR. AIG needs to reduce that $85 billion quickly by selling assets. Anything of value that can be sold easily will likely go.
The $85 billion loan from the Fed just averted AIG’s immediate liquidity crisis. The fact that the Fed owns 80% of AIG means that current shareholders have seen their stake diluted in a major way.
To carry on business going forward and pay back the Fed AIG will have to be a much smaller entity.
AIGUG Canada seems to think they will weather the storm Jim. Do you still feel they will not be around in a year or so?
Weather the storm? They’ve already capsized and sunk to the bottom. The Fed loan just gives them time to raise capital by selling assets. AIG is basically ward of the Fed and they will be looking to get their money back soon (the loan is for 2 years max).
There is no doubt that AIG will be broken-up. Companies like Manulife are circling the wagons right now (see today’s globe). What parts of the business will be kept and which will be sold remains to be seen. In the WSJ on Friday the new CEO of AIG (Liddy) said he would like to keep the P&C business intact. They have already sold their aircraft leasing business.