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Associated Press, January 1, 2009

AIG Facing Possible Breakup

IEVA M. AUGSTUMS 02/27/09 05:49 PM ET

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.

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."

Russell Walker