Financial Times: September 15 2008 19:01 | Last updated: September 16 2008 03:12
AIG, the troubled insurer that sits at the heart of the financial system, on Monday had its key credit ratings cut, potentially triggering billions of dollars of collateral payments on its many derivatives trades.
The ratings cuts come after US authorities moved to fight this latest fire in the crisis on Wall Street, throwing a $20bn lifeline to AIG while convening a fresh set of emergency talks at the Federal Reserve in New York to find potential sources of funds for the insurer.
The ratings cut by Standard & Poors, which downgraded AIGs long-term credit rating to A minus from AA minus late in New York on Monday, reflects the large losses AIG is expected to make on mortgage-related investments and credit derivatives.
S&P warned the insurer could face further ratings cuts – perhaps even into the lower BBB category – unless it is able to implement further liquidity options and the successful sale of at least a portion of its business assets.
Meanwhile Moodys cut AIGs rating to A2 from AA3 and Fitch Ratings downgraded AIG to A from double A minus.
The deal between AIG and New York state insurance regulators allows the company to access $20bn of assets from its own subsidiaries to use as collateral for a loan in an attempt to stave off a liquidity crisis and credit downgrades.
The New York move which was announced by David Paterson, the states governor, in a sign of the growing political fallout from the crisis on Wall Street came just hours after the collapse of Lehman Brothers, and Bank of Americas $50bn rescue offer for Merrill Lynch.
Fears over AIGs financial health sent its shares into a tail-spin. The stock fell as much as 70 per cent in morning trading in New York to an intra-day low of $3.50. It ended the day down $7.38, or more than 60 per cent.
AIG and its advisers spent the weekend hammering out plans to raise up to $40bn in capital, which the insurer needs to shore up its balance sheet in hopes it could prevent potentially crippling ratings downgrades.
AIG is the biggest provider of commercial insurance in the US, one of the biggest writers of life assurance there, and the biggest provider of fixed annuities, a popular retirement savings product. It also has enormous global operations.
But it also has a financial products division that acted like an investment bank and has been at the heart of the current problems. AIG is a counterparty in a large number of swap and hedging transactions. It wrote credit default swaps, which insure against corporate default, some protecting against losses on collateralised debt obligations, complex financial products that have suffered large losses because many of them were backed by assets backed by mortgages.
S&P said on Monday the main source of the strain comes from credit default swaps covering multi-sector collateralized debt obligations with mortgage exposure as well as insurance company holdings of residential mortgage-backed securities.
