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Published October 9, 2008 at 3:01 PM
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 American International Group Inc.'s stock is taking a beating Thursday on news that the Federal Reserve is loaning the company $37.8 billion on top of the $85 billion. So what is AIG doing with all the cash that the Federal Reserve is forking over? Spending it all on swanky conferences?
Nope, but that would be a whole lot simpler.
Continue reading below
AIG has already spent $61 billion on liquidity problems and its credit
default swaps business. Part of the problem is AIG had a huge book of
CDS on mortgage-backed securities that were sold to banks and
investors. AIG lost money on the investments
made from the CDS it loaned to third parties as the credit crunch and
economy worsened. The CDS caused AIG more than $25 billion in
write-downs. So, the Fed's new $37.8 billion will go directly to
settling the transactions with the banks and investors of the CDS. As Peter Cohen of Blogging Stocks
explains, "AIG originally got the government money to help wind down
its structured finance unit, which made the Credit Default Swaps (CDSs)
whose collateral calls put AIG into such a precarious position. But AIG
claims it can't wind down its structured finance business until it
stops the bleeding in the securities lending business."
AIG is also facing tremendous losses from a program that
involves securities
held by highly regulated units that sell life insurance policies. The Fed's additional loan of $37.8 billion in cash was also intended to delay AIG from withdrawing the remaining $24 billion balance of the $85
billion bridge loan. The Fed obviously underestimated the amount needed to pull AIG out of troubled waters with the new total made available to the insurer standing at $123 billion. Now that the Fed owns 80%
of the troubled company, it's in the Fed's interest to keep the company
afloat. But the extra funding is raising questions about whether or not
the government will need to continue giving AIG additional money to keep the company
in business. The
extra funding and the sagging stock could add pressure on AIG to sell
assets faster then it would have otherwise. This could be why
CEO Edward Liddy most likely changed his strategy and decided to find a
buyer for its U.S. life insurance and financial services businesses,
the most valuable asset the company has (It could be worth $41
billion)
and instead turned AIG into a property and casualty operation. Liddy
hired Blackstone Group LP and J.P. Morgan Chase & Co. as advisers
for AIG's divestitures. Here are the operations for sale: - AIG American General, a life insurance company based in Houston
- AIG Direct, which covers auto, motorcycle, recreation vehicle and commercial vehicle insurance
- Alico, its life insurance operations in the U.S., Europe, Latin America, South Asia and Japan
- Real estate,
AIG owns $16 billion worth around the world in more than 30 countries
and 14 U.S. cities including AIG's headquarters at 70 Pine St. in lower
Manhattan
- Financial Services, which includes aircraft leasing, capital markets and consumer finance operations, including AIG's International Lease Finance Corp.
The insurer has already sold its 50% stake in London City Airport
Ltd. to its joint venture partner, Global Infrastructure Partners, for
an estimated $460 million. There are rumors about potential bidders for several of the businesses.
- For the AIG American General the potential bidders
are Allianz SE, Sun Life Financial Inc., Munich Re, AXA Group, Manulife
Financial Group, Prudential Financial Inc., Chubb Corp. and Ace Ltd.
- Potential bidders for Alico, the foreign life insurance business include Aflac (the full value of the business could be $50 billion, Gary Ransom, an
analyst with Fox-Pitt Kelton, told The Associated Press). But AIG might also split up the businesses. American Family Life Assurance Co., Prudential and Allianz have apparently expressed interest in acquiring Alico Japan, AIG Edison Life Insurance Co. and AIG Star Life Insurance
Co., which could be worth over $9.5 billion in
total. The Thai consumer finance business
is up for sale. A stake in Hong Kong-based AIA Holding, which owns the
Thai
life insurance unit through American International Assurance Hong Kong
is for sale. Philippine American Life and General Insurance Co could
have 10 bidders including Philippine
American Life and General Insurance Co. The Wall Street Journal
also is reporting that AIG is mulling the sale of its Brazilian assets,
which include Unibanco-AIG, the fourth-largest Brazilian insurance
company; a 7.34% stake in Providencia Industria e Comercio SA, a
Brazilian manufacturer of plastics and textiles; and a local private
equity fund.
- Real estate. AIG owns almost $16 billion worth of real
estate
around the world in more than 30 countries and 14 U.S. cities.
Bloomberg reports that in New York City alone the insurer controls
three office buildings with more than 2 million square feet. One of
those Big Apple buildings is AIG's headquarters at 70 Pine St. in lower
Manhattan. Experts say the 66-story office building in the financial
district would make for a possible condo and/or residential conversion.
AIG in its 10-Q for the quarter ended June 30 reported about $5.5
billion in real estate and other fixed assets, net of depreciation.
- General insurance business, Transatlantic Holdings Inc. and its mortgage guaranty
could be of interest to many insurers. AIG has a 59% stake in
Transatlantic, which could be worth about $2.3 billion, according to an
unnamed source speaking to The Daily Deal. Interested bidders could
include Berkshire Hathaway Inc.'s Warren Buffett and Maurice "Hank"
Greenberg, AIG's largest shareholder
and former chairman. Greenberg disclosed interest in acquiring the
company through his CV Starr & Co. investment vehicle. Japan's
Tokio Marine Holdings Inc. or Australia's QBE Insurance Group could
also be interested in the assets, according to Reuters.
- Financial Services, which includes aircraft leasing, capital markets and consumer finance operations,
was an asset AIG was said to be exploring the sale of prior to the
Federal Reserve's bailout of the company. AIG's International Lease
Finance Corp., which leases more than 900 aircraft
with asset values over $44 billion, could sell for its book value of
about $7.5 billion, while the consumer finance operation could command
its $2.5 billion book value, according to The Daily Deal. The Wall
Street Journal is reporting that International Lease Finance may be
bought by the unit's founder, Steven Udvar-Hazy. The unit's staff had shown interest in buying it from the parent a few months back.
- Maria Woehr
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