Rare step buys time for insurance giant AIG

Struggling insurance giant American International Group (AIG) will be allowed to use $20 billion of assets held by its subsidiaries to provide cash needed to stay in business, New York Gov. David Paterson said Monday.

The move comes as AIG continues to review operations and discusses alternatives with outside parties, reportedly including Warren Buffett's Berkshire Hathaway, to shore up its business amid concern the world's largest insurer could need billions of dollars to strengthen its balance sheet.

Paterson asked New York state insurance regulators essentially to allow New York-based AIG to give itself a bridge loan. The governor has also asked the head of New York's insurance department to talk with federal regulators about providing an additional bridge loan.

"AIG still remains financially sound," Paterson said.

The move will allow the company to use those assets as collateral to borrow cash to fund day-to-day operations, Paterson said.

It also helps AIG by "giving them what they need most, which is time," said Keefe Bruyette & Woods analyst Cliff Gallant, noting that the relaxation of insurance regulations was "unprecedented."

Typically, a state insurance commissioner's priority is to protect the policyholder, and that includes making it very difficult for an insurer to access funds used to pay claims.

The insurer could face significant claims from hurricanes Ike and Gustav, which have battered the Gulf Coast. But "AIG is a big company, and I would expect they will be able to meet their claims," Gallant said.

"Those events do not cause an immediate cash problem for the company," he added.

If an insurer can't pay its claims, the state's insurance fund, which is backed by other insurers that do business in the state, would help pay off policyholders.

"If anyone's been put at risk, it's the other insurance companies who do business in the state," Gallant said.

AIG has been battered the past year by billions of dollars of losses tied to deterioration in the mortgage and credit markets.

Its shares fell $7.38, or 60.8 percent, to $4.76 Monday. They had been down as much as 71 percent to $3.50 before Paterson's comments.

Late Monday, all three major credit-rating agencies — Standard & Poor's, Moody's Investors Services and Fitch Ratings — dropped AIG at least two notches. While the new ratings are all still considered investment grade, the downgrades add to the pressure on AIG.

AIG is seeking a loan for as much as $75 billion through Goldman Sachs and JPMorgan Chase after the Federal Reserve balked at providing money, according to people familiar with the situation.

Representatives of Wall Street's biggest firms convened Monday at the New York Federal Reserve Bank for a fourth consecutive day, this time to discuss AIG.

The Fed urged the insurer to seek private capital and discouraged it from expecting a loan from the central bank, according to two people with knowledge of the discussions.

New York-based Goldman and JPMorgan are working with AIG to determine how much the insurer needs, said two others, all of whom declined to be identified because negotiations are private.

The loan would involve temporary financing, a so-called bridge loan, through a syndicate of banks, one person said, adding there was no assurance of an agreement.

"We're still working on a number of alternatives," said Nicholas Ashooh, spokesman for New York-based AIG.

JPMorgan's Brian Marchiony and Goldman's Lucas van Praag declined to comment.

Treasury spokeswoman Brookly McLaughlin declined to comment when asked about the possible financing efforts.

Also, the insurer was said to be in "rescue" talks with Buffett.

Berkshire Hathaway spokeswoman Jackie Wilson said Buffett was not available to comment on the AIG-rescue reports.

Typically, Berkshire does not comment on any deals before they are completed.

One possibility is to spin off AIG's aircraft-leasing arm, International Lease Finance Corp. ILFC which posted record results in the second quarter. Founded in 1973, ILFC has a fleet of more than 900 airplanes — many of them from Boeing and Airbus — valued at more than $50 billion.

Material from Bloomberg News was used in this report.