Will AIG go the way of Lehman Brothers?

Lehman Brothers announced today that it was going file for Chapter 11 in the US today and the NY Times reported that AIG has sought a bridge loan of USD40bil from the Federal Reserve to tide over its short term liquidity squeeze.  Got a few calls from clients asking for updates on AIG & its subsidiary American Home Assurance Company but the last I checked with the underwriters – there’s no news yet.

Spoke to Adam… he was wondering if AIG will go insolvent but I don’t think so.  After all, before the subprime woes hit the US financial market, AIG had an asset base of over a trillion dollars and it’s hard to imagine how a company with such a large and diversified asset base can go bust so easily.

While reports have not been optimistic with some analysts claiming that if AIG is further downgraded by credit rating agencies, it may be forced to post collateral of USD13bil, which would wipe out AIG’s liquidity and force AIG to wind up within 48 to 72 hours. 

My personal take is that AIG will be able to weather this storm.  Even if the Fed Reserve decides not to extend the bridge loan to AIG, the latter can still sell some of its profitable subsidiaries so as to raise liquidity.  I think the struggle that AIG is facing is that it hopes to be able to keep these subsidiaries as these are profit generating entities.  Thus, the most ideal way out is to be able to scrap together a bridge loan.  However, in the event that this option isn’t available, AIG will have to sacrifice some of these profitable investments in order to help the parent co. survive this bad patch.

I suppose another alternative would be to transfer funds from profitable subsidiaries to the parent co. in order to raise short term cash.  However, by doing this, public confidence in its shares may not be restored, resulting in the continued languishing of its share price.

Anyway, this is the first time I’ve paid so much attention to the financial markets.  Let’s see if my analysis is right… heh.

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September 2008