Insurer Giant AIG Loses 60Pct Of Market Value; Being Pressured By Credit Rating Downgrades

New York, NY (AHN) - Insurer giant American International Group lost more than 60 percent of its market value Monday and was hit by a series of credit rating downgrades as it scrambled to try to raise capital to avoid that.

AIG is one of the world's largest insurance companies.

Moody's Investors Service, Standard & Poor's and Fitch ratings services each have lowered their ratings of AIG, which is the nation's largest insurer by assets.

The credit downgrades will make it more expensive to issue debt or regain the confidence of investors, industry observers say.

Even worse, if one or both of the other major rating agency downgrades AIG, it would be required to post an additional $10.5 billion to 13.3 billion in collateral at a time when doing so would be problematic. That is being referred to as meeting a margin call on credit defaults swaps that AIG had previously written.

News of AIG's financial woes came the day after Lehman Brothers filed for bankruptcy Bank of America took over financially-strapped Merrill Lynch.

But what is going on highlights the interdependence of the nation's financial systems, says Bank of America credit analyst Jeffrey Rosenberg.

He referred to it as "the circular dilemma facing financials with capital concerns," according to Barron's on Tuesday.

"The lack of capital-raising prompts a downgrade, further worsening the credit risk of the company, further constraining the capital-raising potential,." Rosenberg was quoted as writing by Barron's.

The Federal Reserve reportedly turned down a $40 billion loan to AIG, while suggesting a $75 billion financing package from JPMorgan and Goldman instead, although whether a loan of such magnitude could be arranged in the midst of this ongoing financial crisis is uncertain.

But AIG wasn't totally without friends.

New York State Gov. David Paterson has been granted access to $20 billion of assets that are currently held by its insurance subsidiaries in an attempt to help it work through its current difficulties.

However, although AIG's credit rating remains within that for investment grade securities, the current credit rating downgrades could spark what in effect would be a $14.5 million margin call. What that means, is that AIG would have to pay more to insure its debt - in what is known as the derivatives market - against the possibility of default.

That, in turn, means that instead of paying $1.722 million annually to insure $10 million of its debt for five years that AIG CDS will require a payment of $3.05 million plus another $500,000 annually.

AIG's dropping stock prices helped push the Dow Jones Industrial Average down more than 500 points. A huge loss and the largest one-day drop since the market opened after the Sept. 11, 2001, terrorist attacks.

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