Bank Failures, Meltdown, Spillover, Uncategorized

Squeeze on at AIG


AIG is being hit by downgrades by the ratings agencies, which is not. a. good. thing.

From Bloomberg:

S&P lowered AIG’s long-term counterparty rating three grades to A- because of “reduced flexibility in meeting additional collateral needs and concerns over increasing residential mortgage-related losses,” the rating company said yesterday. Moody’s cut AIG’s senior unsecured debt two grades to A2. Fitch Ratings lowered its assessment to A from AA-.


S&P also lowered AIG’s short-term counterparty credit rating by two levels to A-2 from the top A-1+ rating, and cut its counterparty credit and financial strength ratings on most of AIG’s insurance operating subsidiaries by three notches to A+ from AA+. The ratings remain on watch for a possible further downgrade, S&P said.

Moody’s said in a statement that its decision was made “in light of the continuing deterioration in the U.S. housing market and the consequent impact on the group’s liquidity and capital position due to its related investment and derivative exposures.” Moody’s placed AIG’s long-term and Prime-1 short- term ratings on review for possible downgrades.

AIG piled up net losses totaling $18.5 billion in the past three quarters on writedowns tied to the collapse of the U.S. subprime mortgage market.

“AIG poses a systemic risk because it’s a large counterparty in the financial system,” said Prasad Patkar, who helps manage the equivalent of $1.8 billion at Platypus Asset Management in Sydney. “It’s too big to be allowed to fail.”

The crux of the problem is that AIG has been hammered by its exposure to the housing industry, and the players on wall street know it. The company’s stock has been in an absolute freefall, currently just north of three dollars a share, far below its 52-week high of $70.13.

Downgrades by the ratings agencies (which, for the most part are a complete joke - after all, they just clued in on Lehman… after the investment broker declared bankruptcy) are significant, because they trigger requirements on the part of AIG to maintain certain levels of capital. The problem is that, with a stock price so low, the ability of AIG to raise and maintain that capital is nigh impossible.

That’s the catch-22, Yossarian. The company is downgraded, requiring it to raise capital - but the downgrade makes it almost impossible to raise that capital - which leads to further downgrades and increased capital requirements. You get the point. They don’t call it the death spiral for nothing.

On CNBC they’re apparently already calling it the endgame for AIG - which, should the company fail, would truly mean disaster.


Squeeze, originally uploaded by Tyson Dennien.

1 Comment

speak up

Add your comment below, or trackback from your own site.

Subscribe to these comments.

Be nice. Keep it clean. Stay on topic. No spam.

You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

*Required Fields