[DEBATE] : Biggest Insurer flailing cos of poor risk taking... AIG Facing Possible Breakup

[Riaz Tayob]

[.. even after a bailout it is still reeling...]


AIG Facing Possible Breakup


IEVA M. AUGSTUMS | February 27, 2009 05:49 PM EST | AP


CHARLOTTE, N.C. — Nearly six months after American International Group
Inc. got its first massive bailout from the government, it's still
stumbling.

The big insurer keeps losing money and is unable to sell some of its
biggest assets. Some Wall Street analysts have stopped tracking it.
And it appears on the verge of getting another helping hand from
Washington.

Like Citigroup Inc., which on Friday received another round of federal
support, AIG is considered too big and too important to fail.

"If the government lets AIG fail, I think you are going to see an
enormous sort of shock wave across all industries because AIG had
their finger in a lot of different areas," said Russell Walker, a risk
management professor at Northwestern University in Chicago.

Expectations are that AIG and the government will announce soon,
perhaps as early as Monday, their latest plan to prop up the New
York-based company. Late Friday, AIG confirmed it will report its
fourth-quarter earnings on Monday before the market opens.

The Financial Times, citing people who spoke on condition of
anonymity, reported this week that the government will swap the 80
percent stake it currently holds in AIG for even bigger pieces of
three units that would be split off from the company: AIG's Asian
operations, its international life insurance business and its U.S.
personal lines business. A fourth unit made up of AIG's other
businesses and troubled assets could be created as well or sold off in
pieces, according to the FT report.

In return for the breakup, the government would relax the terms, or
cancel, a portion of the $60 billion loan that was at the center of a
restructured $150 billion rescue package, the newspaper said.

The company may also need another loan, its fourth, from the
government as it is expected to report a $60 billion fourth-quarter
loss Monday.
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AIG has been forced to seek more help because of a combination of
factors including the recession and its falling stock price, now well
under $1. Perhaps its biggest problem is the asset sales that were
supposed to help the company pay back government loans aren't
happening, in part because the credit crisis that initially landed AIG
in trouble last summer is also preventing would-be buyers from getting
financing.

"If companies actually have cash, or the ability to make a purchase,
they are not jumping on AIG right now," said Donn Vickrey, an analyst
with Gradient Analytics Inc. "The prudent thing for (companies) to do
is just say 'no' at this point unless it's just an insanely cheap
price."

That advice doesn't bode well for AIG, which said in October it would
sell off business units to repay an original $85 billion loan from the
Federal Reserve that it received a month earlier. The loan was reduced
to $60 billion in November as part of the larger restructured rescue
package totaling $150 billion; it had roughly $38 billion outstanding
as of this week.

As of Feb. 13, AIG had already sold interests in nine businesses. But
it needs to sell more.

"In ordinary times, the sale of these assets would have been
relatively easy," said Bob Hartwig, president of the Insurance
Information Institute, a New York-based industry group. "The inability
to sell the assets today appears to be more of a function of the
inability to finance the deals as opposed to interest in purchasing
many of these assets."

According to analysts, AIG has been unable to solicit bids for some of
its top units, including American Life Insurance, AIG's U.S. life
insurance operation; American International Assurance, Asia's largest
life insurer; International Lease Finance Corp., AIG's aircraft
leasing subsidiary; and a broker-dealer operation called AIG Advisor
Group.

The lack of interest can be seen in the company's stock price. Shares
of AIG fell 10 cents, or 19 percent, to 42 cents Friday. Shares are
down 96 percent since its first bailout was announced.

Some analysts have given up hope.

"Given the current problems and increased government involvement, it
is an unanalyzable company," Stifel Nicolaus & Co. analyst Michael
Paisan wrote in a note to investors Tuesday, adding he is ending his
coverage of the company. "We have very little confidence in the
ability to analyze future earnings."

Last week, Friedman, Billings, Ramsey & Co. analyst Bijan Moazami also
dropped coverage of AIG, saying the company's predicament is so
uncertain that "analysis of AIG is no longer relevant."

The government steps expected to be announced could put more of a
burden on U.S. taxpayers, but the Obama administration may have no
other option than to take a bigger interest in the beleaguered
insurer.

On Friday, Citigroup agreed to give the government up to a 36 percent
stake in the struggling bank, a move intended to strengthen its
capital base. Citi has already received $45 billion in cash from the
government.

Problems at AIG did not come from its traditional insurance
operations, but instead from its financial services units, and
primarily its business insuring mortgage-backed securities and other
risky debt against default. The government maintains it needed to bail
AIG out last September, saying the company's failure would have
further disrupt markets and threaten the already fragile economy.

AIG's traditional insurance subsidiaries are widely viewed as safe. If
AIG needed to file for bankruptcy protection, "AIG's insurance
subsidiaries are separately capitalized and would continue to
operate," Hartwig said.

In recent days, AIG has said that it's evaluating "potential new
alternatives" to fix its problems. Exactly what those are, the company
won't say.

"We continue to work with the U.S. government to evaluate potential
new alternatives for addressing AIG's financial challenges," AIG
spokeswoman Christina Pretto said Friday. "We will provide a complete
update when we report financial results in the near future."

Hartwig said, "we don't know what the form of the deal might be," and
added, "obviously there are hot and heavy negotiations going on."

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