Dance like no one's watching

By Hugh Son

Sept. 16 (Bloomberg) — American International Group Inc. investors led by former Chief Executive Officer Maurice “Hank” Greenberg may consider taking control of the insurer through a proxy fight or buyout.

The investors also are considering acquiring New York-based AIG’s subsidiaries or making loans to the company. They disclosed their options today in a regulatory filing.

Greenberg may be seeking to rescue the insurer that is struggling to raise cash amid losses tied to U.S. mortgages and credit downgrades. Greenberg, who was ousted in 2005 amid a regulatory probe into accounting, controls about 11 percent of the company through personal holdings and companies he heads. The stake has plunged in value as AIG stock declined more than 90 percent this year.

Greenberg’s group is reviewing its options “in light of current circumstances relating to” AIG, the filing said.

AIG declined $1.71, or 37 percent, to $3.02, paring losses from earlier in the day when shares were down 74 percent.

Glen Rochkind, a spokesman for Greenberg, declined to comment.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

Last Updated: September 16, 2008 13:12 EDT

By Erik Holm and Christine Richard

Sept. 16 (Bloomberg) — A collapse of American International Group Inc., the insurer seeking to raise as much as $80 billion, would have consequences for financial firms around the globe, analysts and investors said.

Wall Street’s top firms, and the biggest companies in Europe and Asia, have bought protection on $441 billion of fixed-income assets from AIG to guard their investments against potential bankruptcies. A failure by New York-based AIG may cause those protections to vanish. AIG insures some of the largest assets in the world, and does business in more than 100 countries.

“They have tentacles into everything, and they are certainly critical to the ongoing health of the financial markets, or lack of health,” Anton Schutz, president of Mendon Capital Advisors Corp. in Rochester, New York, said in an interview today with Bloomberg Television.

Wall Street’s largest firms met at the New York Federal Reserve for a fifth day today, discussing ways to save AIG, said a spokesman for the New York Fed. AIG, with $1 trillion in assets, piled up net losses totaling $18.5 billion in the past three quarters on writedowns tied to the collapse of the U.S. subprime mortgage market.

“If AIG goes under, there could be a domino effect,” said Andrea Cicione, a credit strategist at BNP Paribas SA in London. “AIG is very connected to the financial system and it is very connected to the real economy.”

Merrill Lynch

Financial insitutions are tied to AIG through its financial- products unit, which wrote protection on a decline in the value of collateralized debt obligations, or CDOs.

Merrill Lynch & Co., which agreed to be acquired by Bank of America’s Corp. this week, held $6 billion of collateralized debt obligiations hedged with insurers at the end of the most recent quarter, according to filings.

“It’s impossible to know which insurance company they’re referring to, though if it is AIG, it may have emboldened AIG to go to the Fed,” said Janet Tavakoli, president of Tavakoli Structured Finance in Chicago.

AIG fell as much as 74 percent in New York trading today after the insurer’s credit ratings were cut, threatening efforts to raise funds to keep the company afloat and roiling global financial markets. It fell $1.82 to $2.94 at 12:04 p.m. in New York Stock Exchange composite trading.

AIG is the largest corporate insurer in the U.S., and sells protection against some of the biggest risks, insuring planes and commercial shipping and providing coverage against terrorist attacks.

AIG’s Reach

The company gets more than 40 percent of its revenue from property and casualty customers. AIG provides coverage for offshore oil drilling platforms in the Gulf of Mexico, warrantees for televisions in Brazil, and insurance that complies with Islamic law in Bahrain.

AIG probably has one day to raise $75 billion to $80 billion, New York Governor David Paterson said today on cable- television channel CNBC. A collapse would be felt beyond the insurance industry, he said.

“It affects jobs, it affects policyholders, it affects drivers,” he told CNBC. “This is a catastrophic problem waiting if we’re unable to contain it.”

The Fed urged AIG to seek private capital and discouraged the insurer from expecting a loan from the central bank, according to two people with knowledge of the discussions. Goldman Sachs Group Inc. and JPMorgan Chase & Co. are working with AIG to determine how much the insurer needs, said two more people, all of whom declined to be identified because negotiations are private.

`Systemic Risk’

“AIG poses a systemic risk because it’s a large counterparty in the financial system,” said Prasad Patkar, who helps manage the equivalent of $1.8 billion at Platypus Asset Management in Sydney. “It’s too big to be allowed to fail.”

Without outside help from the U.S. government or investors, AIG will be forced into bankruptcy, said Maurice “Hank” Greenberg, its former chairman and chief executive officer. Greenberg, who controls the largest stake in the insurer, saw his holdings decline by $3.1 billion last week.

AIG would be able to sell assets to raise the funds it needs “given some time,” Greenberg said on CNBC today. Allowing it to fail would create a “systemic” issue, he said.

To contact the reporters on this story: Erik Holm in New York at eholm2@bloomberg.net; Christine Richard in New York at crichard5@bloomberg.net.

Last Updated: September 16, 2008 12:05 EDT

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P.S. If there’s one thing I learnt from the Asian Financial Crisis, it’s when you owe the bank $1M, the bank owns you.  When you own the bank $1B, you own the bank.  I don’t think the US can afford for AIG to go down.

Heard from Phiten today that there was a long queue of people at the AIA Customer Service and the GE Building during lunch as people rushed to surrender their insurance policies in light of the bad patch AIG is going through.  Gosh.  I suppose if a person isn’t really involved in the financial industry, the person would easily assume that AIG is going to collapse overnight.  If someone drew that conclusion after sound analysis, that’s ok.  Unfortunately, I think it’s just mass hysteria that’s kicking in.

Anyway, here’s in layman language some of the common terms that are flying around now…

Qn: What does it mean to be "insolvent"?

Ans: Insolvency is when your liabilities (i.e. debts) exceed your assets (i.e. things you can sell to clear your debt).

Qn: When you file for bankruptcy, does it mean you have no more money left?

Ans: No.  When someone or a company files for bankruptcy, it means that person/company has applied to the courts to be declared legally insolvent.  The court will then appoint an administrator aka the Official Assignor (an officer of the court) to liquidate as much assets as possible to pay off the debts.

Qn: What is Chapter 11?

Ans: A company filing of Chapter 11 in the US is similar to a company going for judicial management in Singapore.  The court can appoint competent persons (quite often independent auditors) to take over the running of the company, instead of letting creditors take full control over the remaining assets of the distressed company.  This sometimes allow distressed companies to work out their debt (debt restructuring, rescheduling of repayment schedules with creditors, etc) instead of winding up completely.  However, in cases where it is decided that it is best for the company to be wound up, the appointed judicial managers will liquidate the remaining assets in the best way possible so as to repay as many creditors as possible.

Qn: What is CDO?

CDO stands for Collateralised Debt Obligation.  CDO is a credit product that is backed by a host of securities ranging from assets, loans, bonds, etc.  In the case of the recent sub-prime meltdown, banks and insurers that were hit were those who held CDOs that were backed by sub-prime loans.  A sub-prime loan is a high risk mortgage made to debtors who were of poor than usual credit standing. 

Qn: What is CDS?

A CDS (Credit Default Swap) is a credit derivative contract used typically by banks (and sometimes insurers) to hedge risk.  There are 3 parts to a CDS – the Buyer, the Seller and the Reference Entity.  The Buyer of the CDS pays periodic payments to the Seller in exchange for indemnity compensation in the event the Reference Entity suffers a default (aka a credit event).

The CDS is a competing product to a Credit Insurance Policy where the Insured would pay premiums to the Insurer for compensation payment by the latter in the event of a default under the insured Debt Instrument.

Qn: What is Standard & Poor’s or Moody’s?

Ans: These are credit rating agencies that evaluate the financial strength of companies, government, etc.  Entities rated BBB and above are considered "investment grade".

Qn: Why did a downgrade of AIG’s rating trigger a collateral call?

Ans: When lenders extend loans to borrowers, it is based on the assumption that their financial rating is able to support the repayment of the loan.  Loans typically have conditions in them requiring borrowers to maintain certain Debt to EBITA ratio, etc.  In the event a borrower’s financial strength is deemed to have deproved, under the loan agreements, lenders are usually allowed to require the borrower to provide more collateral for the loan.

OK… I think that’s all I can cover for today… does this help anyone understand the terms you see in the news better?  I guess there’s a need to delve deeper into the issues behind the financial meltdown we’re seeing in the US now… but… it’s really too much to type in one post!

I can practically taste the F1 mania arriving on our shores…

Many emails flying around from management (looks like US is working overnight) regarding AIG’s downgrade from S&P ‘AA-‘ to ‘A-‘ and AHA’s (American Home Assurance Company) downgrade from S&P ‘AA+’ to ‘A+’.

The Beast also sent an email to us saying if any of the cancellation clauses in our policies are triggered ‘cos of the downgrade, the Beast is pleased to assist.  But… The Beast… being a Lloyds’ syndicate, is also rated S&P ‘A+’.  So… what makes them better than AHA?  Perhaps The Beast is banking on the fact that apart from its syndicate’s own financials, there is also a Lloyds central fund of (I think) USD 1b for any of the Lloyds’ syndicate to draw on in the event it runs into financial difficulties.  That said, if AIG chooses to sell any of its assets, say it’s aircraft leasing subsidiary… it can potentially gain USD 5b from the sale.   So you do the sums…

I feel bad about the hit AIG is taking now… especially since some of the nicer underwriters I’ve been working with are from AIG (2 very nice angmohs – one in Canada and one in HK).  Well, if I had cash, I would invest in AIG stocks now.  Anyone can lend me some $$?

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.

Hehe.. realised my title can be a little misleading.  Got a beauty question for all girls out there actually… how do you draw your eyeliner on your upper eyelid?  Do you draw the line above or below the lashes? 

I recently got inspired to use eyeliner again after doing eye makeup hassle free for my cousin’s wedding last week.  I usually draw the line above my lashes… but Booze Queen advised that if I don’t want to "hide" my double eyelids, I should draw the line below the lashes. 

I tried it the next day and it worked.  My double eyelids were more obvious when I drew the line below the lashes.  The entire look was more natural… but the eyes weren’t as pronounced?

Sigh.  So I’m in a dilemma now… to draw above or below?

Suan – To pass a sarcastic remark

You know, sometimes, some suans are so good, I consider them works of art.  Here’re some of the good ones I’ve received / given / heard.

Suan #1

Was having drinks with Bigmac, Upsize (a guy), Azure and Booze Queen two weeks ago.  We started talking about bikinis and Bigmac asked if all girls have bikinis.  Upsize then said we should have a D&D with a beach theme or something so all the girls can wear bikinis.

Upsize: So UptownGal, would you wear a bikini to our D&D?

Me: Sure.  If you wear one, I’ll wear as well.

Upsize: No problem.  I’ll wear one…so make sure you do the same.  In fact, I’ll do better than that.  I’ll go topless…

I was stumped for words.  Upsize’s suan was too good…

Suan #2

There was this Hokkaido fair at Tampines Mall some time ago and Iceman and I took a quick tour since we were waiting to watch a movie.  The fair was held at the first floor atrium area and there were several "openings" that allowed access into and out of the fair area.  As there was no clear entrance / exit markings, the crowd just squeezed in and out of all the "openings".

Iceman and I were squeezing out of one of these openings when this short and fat auntie was squeezing in.  She looked at us grumpily and said loudly to her daughter, "Hiyah!  See these people lah.  Blocking our way.. how to walk in!"

I looked at her in the eye and said, "If you were thinner, then can already lor!"

That left her stunned… and I walked out.  Hehehehehehe.

Suan #3

This is a real classic… my ex-colleague told me this incident about a decade ago.. and I never forgot it.

This ex-colleague likes to hum/sing to himself.  After buying a new CD one day, he couldn’t stop singing the songs from the CD till his friend said, "Stop singing can?  I don’t like to listen to pirated version…"

Wahahahahaha.

Hey bride & groom!  Congratulations on your wedding.  Dessert was excellent.  :P 

May your lives together be as sweet as the chocolate tart!

Watching this super old SBC/TCS show now called 傻妹情娇 (aka Sister Dearest).  It’s so dumb it’s hilarious.  Some of the scenes are so bad that they make my hair stand.  It’s serious cringe-worth material man.  The cast of the show includes my favourite TCS actor, Sean Say, Wang Yu Qing, Cassandra See and that Cheryl something… the one who acted in some shampoo ad and married that "remiser king", Peter Lim.

The fashion paraded in the show’s really bad too.  But I guess that’s just the style from the 80s-early 90s.  Hehehehe.  What I do like is the music.  Heh.  Maybe ‘cos I belong to that era too… hahahahaha.