Just the largest US insurance company, and not a bank. Ben will not feel compelled to save them unless they represent significant counterparty risk to banks.
In a discussion today on Bloomberg, Fed head Jeff Lacker of Richmond indicated that while the common equity holders of Fannie and Freddie may take a hit, the preferred shares are another matter since "they are heavily owned by the banks, and we cannot have the banks being hurt by taking losses."
If that happens, if the banks are bailed out as a part of the nationalization of Fannie and Freddie, then free markets and risk-based capitalism are a thing of the past. The Fed and Wall Street will attempt to do whatever it takes short of burning down the rest of the country to save the few big banks.
AIG Falls as Goldman Says a Capital Raise Is `Likely'
By Hugh Son
Aug. 19 (Bloomberg) -- American International Group Inc., the biggest U.S. insurer by assets, led the decliners in the Dow Jones Industrial Average after Goldman Sachs Group Inc. said it's ``increasingly likely'' the firm will have to raise more capital.
AIG may have to pay $20 billion on credit-default swaps that the company sold to protect fixed-income investors against losses, resulting in rating-firm downgrades and a ``large scale'' capital raise, analyst Thomas Cholnoky said in a note today. The company dropped $1.67, or 7.7 percent, to $19.93 at 12:06 p.m. in New York Stock Exchange composite trading.
Chief Executive Officer Robert Willumstad, 62, hasn't ruled out raising more capital after three straight quarterly losses driven by about $25 billion in writedowns tied to valuation declines on the swaps. AIG may eventually have to pay as much as $8.5 billion on the contracts, three times more than the firm previously estimated, the New York-based insurer said Aug. 7.
``Investor confidence in AIG is damaged,'' Cholnoky wrote. ``The stock may continue to drift downward as investors remain wary of the possibility of a dilutive capital raise.'' Cholnoky cut his 12-month price target to $23 from $30.
AIG has declined 66 percent this year in New York Stock Exchange composite trading, the worst performance in the Dow Jones Industrial Average. The company raised $20.3 billion in May by selling debt and equity.
The insurer hadn't made any payments on the swaps as of Aug. 7 and posted $16.5 billion of collateral through July 31 demanded by investors who purchased protection through the contracts. The swaps guaranteed $441 billion of assets at the end of June, including $57.8 billion in securities tied to subprime mortgages.
`Troubling' Risks
AIG's losses put the company at risk of losing employees and may convince potential customers to take their business elsewhere, said Cholnoky, who rates AIG ``neutral.'' Investors who believe AIG's writedowns will eventually reverse, must consider ``the important and troubling near-term risks,'' he said.
Cholnoky correctly predicted that AIG would post a loss in the fourth quarter of 2007, while the average estimate of 18 analysts surveyed by Bloomberg was for profit of 73 cents a share.
The insurer may raise $20 billion in a worst-case scenario to cushion writedowns, Sanford Bernstein analyst Todd Bault said Aug. 13 in a note. The capital would be required if Willumstad decided to stem future losses tied to the housing market by selling subprime-related holdings at a loss and buying the securities tied to credit-default swaps, Bault said.
Rating Downgrade
Willumstad, also chairman of AIG, was named CEO in June. He has promised to complete a review of AIG by Sept. 25 to help return the insurer to profitability.
Nine analysts recommend investors accumulate AIG shares, 9 say to ``hold'' and one says ``sell,'' according to Bloomberg data.
Standard & Poor's cut AIG's credit rating by one level to AA-, the fourth-highest investment grade, in May after the company posted a record $7.81 billion first-quarter loss.
Another downgrade is likely ``if earnings do not stabilize by the third quarter,'' S&P said Aug. 7.
Investors may demand $13.3 billion more in collateral if the insurer's credit rating is downgraded again, AIG said Aug. 6 in a regulatory filing. Ratings reductions ``could have a material adverse effect on AIG's liquidity,'' the insurer said.