AIG tumbles, as Wall ST bubble burst gets out of control

NEW YORK (Reuters) – American International Group Inc shares plummeted after the insurer's credit ratings were cut, heightening concerns it might file for bankruptcy and further upset the global financial system.

In late-morning trading, AIG shares were down $2.29, or 48.1 percent, at $2.47 on the New York Stock Exchange, after earlier falling as low as $1.25. The shares had fallen 60.8 percent on Monday.

The shares recovered much of their early losses after CNBC television said government money might be used in a bailout of AIG. But the shares later fell back after the network said U.S. Treasury Secretary Henry Paulson opposed using government money and that a private sector solution wasn’t likely.

AIG is the latest company to be convulsed by a mortgage and credit crisis that this week led to a bankruptcy filing by Lehman Brothers Holdings Inc (LEH.P: Quote, Profile, Research, Stock Buzz) and the sale of Merrill Lynch & Co (MER.N: Quote, Profile, Research, Stock Buzz) to Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz).

New York Gov. David Paterson said on CNBC television that AIG has "a day" to solve its problems.

"The Federal Reserve is the only one with the balance sheet and wherewithal to deal with AIG’s problems," said Keith Wirtz, chief investment officer of Fifth Third Asset Management in Cincinnati. "If the government comes in, this would be a huge relief."

The Fed declined to comment.

AIG late Sunday had asked the Fed for help, including a possible "bridge" loan to tide it over while it pursues asset sales and capital raising.

"HEIGHTENED PROBABILITY" OF BANKRUPTCY

Monday’s rating downgrades will make it much more difficult for AIG Chief Executive Robert Willumstad to raise cash, and could trigger demands that the company come up with nearly $20 billion.

The insurer has suffered $18 billion of losses in the last three quarters tied to guarantees it wrote on mortgage-linked derivatives. It ended June with $1.05 trillion of assets. Its failure would likely be larger than that of Lehman, which said it ended August with about $600 billion of assets.

Credit Suisse analyst Thomas Gallagher halved his price target on AIG to $3, citing a "heightened probability" of a bankruptcy filing.

"While there is a chance the company can work its way through its liquidity problems if it can secure substantial bridge financing, we think this will be challenging to execute in the current onerous credit environment," he wrote.

AIG ended 2007 with 116,000 employees, more than four times as many as Lehman.

DOWNGRADES

Late Monday, Standard & Poor’s cut AIG’s long-term credit rating three notches to "A-minus" from "AA-minus," citing "reduced flexibility in meeting additional collateral needs and concerns over increasing residential mortgage-related losses."

Moody’s Investors Service on Monday cut AIG’s rating two notches to "A2" from "Aa3," while Fitch Ratings cut its rating two notches to "A" from "AA-minus."

The downgrades mean that AIG’s trading partners can require the insurer to post an additional $14.5 billion of collateral, according to an August 6 regulatory filing. They could also result in the early termination of some contracts, requiring an additional $5.4 billion of payments, the filing shows.

"Many people think AIG is too big to fail, but the world will not come to an end if it fails," said Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel Inc in Cincinnati.

Despite its problems, AIG has many profitable businesses it could sell, including life insurance, property and casualty insurance, and aircraft leasing. Greenberg estimated the company could raise $20 billion from asset sales if given the time.

On Monday, Paterson said New York would let AIG essentially loan itself $20 billion by shifting liquid investments to itself from some of its regulated insurance units.

AIG’s 5.85 percent notes maturing in 2018 fell 11 cents on the dollar to 36 cents, yielding 22.55 percent, the Financial Industry Regulatory Authority bond pricing service Trace said.

Investors on Tuesday were paying $5.2 million up front plus $500,000 annually to protect $10 million of AIG debt against default for five years, up from $3.3 million up front on Monday, according to Phoenix Partners Group.