AIG's $61.7bn crash sends markets plunging
The crisis-stricken insurance company AIG has crashed to the biggest corporate loss in US history, with a deficit of $61.7bn, after suffering devastating liabilities on policies to protect banks against bad loans.
In a renewed effort to prevent AIG from collapsing, the US government today provided it with $30bn in emergency aid. This money comes on top of $150bn of taxpayers' funds advanced to AIG last year.
The scale of AIG's losses sent US markets plunging in early trading, with the Dow Jones Industrial average falling below 7,000 for the first time since 1997. The Dow closed down nearly 300 points at 6,763.29, with the Standard & Poor's 500 falling 4.7% to close at 700.82.
London's index of leading shares closed down 5.33% at 3625.83, its lowest level since the outbreak of the Iraq war at the end of March 2003. Markets in Europe also fell heavily, after big losses in Asia.
Financial shares led the way lower on both sides of the Atlantic. HSBC wiped more than 40 points off the FTSE 100 on its own, with its shares tumbling by 25% at one stage after its profits fell by 62%. The FTSE 100 has not closed below 3,780 during the current financial crisis, but the City is gripped by a new feeling of pessimism about the UK's prospects, and the state of the world economy.
City experts predicted another volatile few days with the prospect of dire US unemployment figures due on Friday looming over the week.
"We're seeing falls in Asia, the oil price is dropping, and on Friday we'll get some pretty torrid non-farm payroll figures," said Manus Cranny of MF Global.
Some analysts believe that the FTSE is poised to fall much further.
AIG's fourth-quarter loss means the firm haemorrhaged some $678m per day in the final three months of 2008, amounting to a loss of $28m per hour.
Its financial problems eclipse the previous US record quarterly loss of $54bn by Time Warner in 2002 following its merger with AOL. The loss easily exceeds Royal Bank of Scotland's recent record-breaking UK loss of £24bn for 2008.
A large part of AIG's difficulties derives from a London office that dealt in highly complex transactions providing insurance for financial institutions on securities once considered low-risk, such as mortgage-related assets at the height of the property boom.
AIG chief executive Ed Liddy, who was appointed under the instructions of the US government in September, said the company was too large to be allowed to fail.
"Quite simply, the government believes, and we do also, that AIG is a systemically important financial institution," said Liddy on a conference call in New York. "There are just too many -people and too many institutions in the world that depend on the promise represented by an AIG commitment."
Operating in 130 countries, AIG has 74m customers and policy holders. It is the world's largest insurer against property damage and the top provider of retirement savings for schoolteachers and healthcare workers.
Of its $2tn financial products operation, some $1tn protects 12 global banks. The company insures the property of 94% of America's Fortune 500 companies and is the biggest owner of aircraft in the world.
"The marketplace is a pretty crummy place to be right now," said Liddy. "When the world catches pneumonia, we get it too, in spades, because we're so large."
He added: "If AIG were to fail, the impact on customers and counterparties around the world would undermine an already unsettled global financial system."
In a joint effort, the US treasury and the Federal Reserve are restructuring their previous lifeline to AIG by reducing interest payments and by providing a fresh capital facility of $30bn in return for preferred stock.
Taxpayers will hold 77.9% of AIG but the package has been structured to prevent public ownership from going above 80% – a level that could require AIG to be placed on the treasury's books.
AIG's management team stressed that the bulk of its day-to-day insurance operations remains profitable. Urgent attempts are being made to raise money by selling businesses, although buyers are proving hard to come by.
"There's a lot of swimming upstream against a very difficult current," said Cathy Seifert, an equity analyst at Standard & Poor's in New York.
She suggested that AIG's aircraft leasing arm, International Lease Financing Corporation, could prove one of the more attractive units to buyers. The business provides planes to scores of airlines, including Virgin Atlantic, BMI and Thomas Cook.
But Seifert added that shareholders in AIG are unlikely to see much return after the company's creditors have been paid off: "In terms of an equity holder, there's going to be very little left over."
During trading on Wall Street, AIG's shares ended flat at 42 cents. A year ago, the stock was changing hands for $46.
[Source: The Guardian, London, UK, 02Mar09]
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