AIG Stock: What You Need to Know - TheStreet

AIG Stock: What You Need to Know

Go beyond the bailout headlines with TheStreet.com.
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Publish date:

Updated from September 16

How much do you really know about the current news surrounding insurance giant

AIG

(AIG) - Get Report

?

Get up to speed with

TheStreet.com:

From

AIG Bankruptcy Threat Forced Fed's Hand

:

AIG will receive an $85 billion bridge loan from the

Federal Reserve

aimed at keeping the giant insurer out of bankruptcy and preventing the acceleration of a world credit crisis.

"The

Federal Reserve Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance," the central bank said in statement posted on its Web site at 9 p.m. EDT Tuesday.

"This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy." The Fed said the AIG facility has a 24-month term.

The Fed said that "the interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries.

"The loan is expected to be repaid from the proceeds of the sale of the firm's assets. The U.S. government will receive a 79.9% equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders," the statement said.

As part of the deal, Treasury Secretary Henry Paulson insisted that AIG's CEO executive, Robert Willumstad, step aside, the

Wall Street Journal

reports. Willumstad will be succeeded by Edward Liddy, the former head of insurer

Allstate

(ALL) - Get Report

.A bankruptcy filing by AIG would have been significantly worse than that of

Lehman Brothers

(LEH)

in its impact on other financial institutions around the globe, according to several market participants, including the heads of two of the world's largest bond funds.

Read the full version of

AIG Bankruptcy Threat Forced Fed's Hand

.

From

Congress Mulls '80s-Style Resolution Trust

:

Sen. Chris Dodd (D., Conn.), chairman of Senate Committee on Banking, and Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, have both mentioned the idea of reviving an institution from the 1980s, the Resolution Trust Corporation.

In short, it's starting to feel like the S&L crisis of some 20 years ago.

Resolution Trust Corporation (RTC) was created in response the savings-and-loan crisis that gripped the country in the late 1980s. By the time the smoke cleared, RTC had closed 747 institutions involving $394 billion in assets. In 1995, the RTC folded into the Federal Deposit Insurance Corporation (FDIC).

Read the full version of

From Congress Mulls '80s-Style Resolution Trust

.

From

AIG Asset Swap Off the Table

:

American International Group won't be raiding its insurance subsidiaries for cash after all. The New York State Insurance Department confirmed Wednesday that the proposed asset swap announced by Gov. David Paterson on Monday is no longer an option following the $85 billion bailout by the Federal Reserve.

"It died last night," said David Neustadt, the department's deputy superintendent for public information. "The asset swap will not now take place."

The death of the plan is good news for policyholders, who were left in the dark about their policies as the National Association of Insurance Commissioners, known as NAIC, announced yesterday afternoon that the insurance commissioners of New York and Pennsylvania were working with AIG. The insurer would have swapped its illiquid assets for its subsidiaries' liquid assets.

Read the full version of

AIG Asset Swap Off the Table

.

Plus, don't miss

States Mobilize to Protect AIG Customers

.

From

Cramer: Better After the AIG Save

:

You have to understand that we simply wouldn't be able to open most financials if AIG had failed. Our new sovereign wealth fund, the Federal Reserve, came up with an elegant plan to take over AIG and make good on what would have been broken guarantees that would have caused worldwide capital calls and bank closings that honestly would have made the Great Depression seem like the Little Depression, World War I to our new World War II. That's worth avoiding.

Read the full version of

Cramer: Better After the AIG Save

.

From

Cramer: We're in 1987 Mode

:

In 1987, we believed that all the major firms in the brokerage industry were going to go belly-up... It felt like the end of the world. It wasn't. But it was eerie.

We are in that mode again... In many ways, this time it is

worse

than 1987 because AIG and

Fannie

(FNM)

and

Freddie

(FRE)

and

Lehman

(LEH)

still haven't been sorted through. We have too many aftershocks that we must worry about, and there is too much damage in the system. Plus, there is now a sense that the U.S. government has become a cartoon government with a cartoon currency and a cartoon Fed. No rate cut? Oh my! How wrong!!

I think the Fed is in shock that we are not doing better today, but what they failed to recognize is that the erosion in confidence from their worrying about inflation is staggering.

I want to make it clear: In many ways this period right now is worse than 1987... Right now we are experiencing a true meltdown in financials. There is very little hope at this moment that we can turn it around ourselves.

I think that unless we get some outside help from the Middle East or China, it won't end. Our government has made so many mistakes, our Fed has made so many mistakes, that I can understand why people would panic.

I simply have to believe, though, that there is outside capital that wants in. I believe that money does exist that can come in and stabilize things. But I also want to point out that without it, we are most likely not done going down.

Read the full version of

Cramer: We're in 1987 Mode

.

From

Crescenzi: Fed's Treasuries Running Out

:

The Fed had close to $800 billion of Treasuries at the start of the year. Last week the Fed had $479 billion in Treasuries, of which $200 billion was pledged to the term securities lending facility, the facility whereby the Fed lends its Treasuries to dealers in exchange for agencies, mortgage-backed securities and other non-Treasury collateral.

If the Fed lends $85 billion to AIG, the Fed's Treasury holdings will be down to $195 billion. The tally is so low that it is becoming imperative for the Fed to take actions to enlarge its balance sheet.

Read the full version of

Crescenzi: Fed's Treasuries Running Out

.

Cramer on AIG Rescue (Video, Sept. 17)

Cramer: "There is just a tremendous disconnect between how much better today is than yesterday, but that's okay... That's where the great opportunities come from."

To watch the video, click the player below:

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Plus, don't miss

Cramer: Fire Chris Cox

(Video, Sept. 17: Cramer says, "Chris Cox

SEC Chief doesn't really understand the markets... I spent a lot of time analyzing the 1929, 1932 market crash and also the hearings that were held. And the things that happened in that period are happening again.")

From

Activist: Stale Ideas Killed AIG, Lehman

:

As we all try to digest the unprecedented volatility that has besieged the stock market this week... there is one question that is often repeated:

How could so many smart people get things so wrong?

It wasn't hubris or laziness. It was the inability of the board members and CEOs to look at the problems facing their companies with fresh eyes.

Old-time CEOs like Dick Fuld at Lehman and Robert Willumstad at AIG, who is a new CEO but has been on AIG's board since 2006, dawdled, and their companies are now paying the price -- one with bankruptcy and the other agreeing to a government bailout last night.

Management theorists Don Hambrick and Danny Miller conducted a study on the seasons of a CEO's tenure 20 years ago. They found that CEOs had the freshest eyes early in their tenure... After only a few years though, the CEOs began running their companies from within the prism of their past decisions. If their strategy didn't work out, they would defend it, stating that it simply needed more time.

This tendency for defensively believing in past decisions is not a CEO condition -- it's a human condition. It's not a trait that gets noticed when times are good, but it can be a deadly trait in so-called "perfect storm" times like the one we're currently living in.

Read the full version of

Activist: Stale Ideas Killed AIG, Lehman

AIG: Before the Fed's Big Move

From

AIG Meets With Fed; Shares Continue Dive

:

If AIG does not secure fresh funding by Wednesday

Sept. 16, it could follow

Lehman Brothers'

(LEH)

into bankruptcy, the

Wall Street Journal

said.

The paper reported Tuesday that a New York

Federal Reserve

spokesman confirmed a second day of meetings on AIG were underway at the Fed's lower Manhattan headquarters. He declined to comment on a

CNBC

report that a federal bailout was in the works for the company.

But federal officials seemed reluctant to aid AIG with a bridge loan from Fed, which the insurer sought in Monday's meeting at the Fed.

"What is going on right now in New York has got nothing to do with any bridge loan from the government," Treasury Secretary Henry Paulson said in a Washington, D.C., news conference Monday, noting the talks in New York revolved around a private sector solution to the crisis.

Read the full version of

AIG Meets With Fed; Shares Continue Dive

.

Plus, don't miss:

AIG Plans Major Restructuring: Report (Sept. 15: Managers at the nation's No. 1 insurer were trying to put together the plan Sunday afternoon and present it to the company's board for approval, the Wall Street Journal reported, citing people familiar with the situation.)

AIG Buys Time, as New York Loosens Regs (Sept. 15: AIG will be allowed to use $20 billion in assets held by subsidiaries to help stay in business, New York Gov. David Paterson said in a press conference Monday. The insurer, which has already raised $20 billion in fresh capital in 2008, on Sunday turned down an offer from private equity firm J.C. Flowers & Co. that would have allowed the investor to acquire AIG for $8 billion under certain circumstances, the Wall Street Journal reported.)

Analysts' Upgrades, Downgrades: AIG (Sept. 15: AIG downgraded at Merrill from Buy to Neutral... Company will face higher losses and try to obtain dilutive financing.)

From

When an Insurance Company Fails

:

American International Group is a holding company that owns 71 domestic insurance companies that sell virtually every type of coverage, including life, health, annuities, property, auto, aircraft and product liability.

Insurance companies are regulated at the state level by the insurance department in which the individual subsidiary is based. When an insurance company gets into trouble, the state regulator steps in and takes control of it.

"The state insurance commissioner effectively becomes the CEO of the company," explained Joseph Belth, professor emeritus of insurance at Indiana University and editor of

The Insurance Forum

.

If the regulator believes that the company has good assets and a strong book of business, the regulator will direct it to be rehabilitated.

"The commissioner seeks to rehabilitate the company and minimize losses to policyholders, which could include selling all or parts of the company or modifying policy structures," Belth said.

In the case of policy modifications, i.e., lowering of guaranteed interest rates or increasing premiums, Belth said that a court order would be required, and affected parties would have input.

If the company is in dire financial shape, the regulator will take it over and immediately begin liquidating its assets.

Read the full version of

When an Insurance Company Fails

.

From

AIG, States Work Together to Raise Cash

:

American International Group is getting help from the insurance commissioners of New York and Pennsylvania in raising cash by swapping its subsidiaries' liquid assets for those that are difficult to convert into cash held by the parent company.

"If you have a policy with an AIG insurance company, they are solvent and have the capability to pay claims," said Sandy Praeger, president of the National Association of Insurance Commissioners and Kansas insurance commissioner, in a press release today. "Our job is to ensure they continue to have the ability to pay."

Read the full version of

AIG, States Work Together to Raise Cash

.

From

Cramer: The Market's Fate Rests With AIG

(Video, Sept. 16):

Cramer: "There are only two companies that can't fail: AIG and

Citigroup

(C) - Get Report

... Unfortunately, it's not the U.S. government that needs to help AIG, it's Europe... AIG has such terrible disclosure. We have no idea who their customers are... AIG insured a huge amount of financial products in Europe when they felt that in 2005 that this market was going down... and they don't have the capital to make good on those... I could see Citigroup failing and mean less to the market than AIG... The people in government -- I have come to believe -- are far less sophisticated... to the ramifications of AIG... AIG is a huge, huge liability."

To watch the video, click the player below:

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From

Cramer: SEC Played a Big Role

:

Let's take AIG. Here's a company that has lots of liabilities but also lots of assets. While its liabilities are liquid -- meaning it has to pay them off quickly if there is an event that triggers payment -- its assets, such as its great life insurance and aircraft leasing businesses, are illiquid. AIG couldn't just turn around and sell them.

Still, new management came in at AIG and decided to work on a plan, meant to be revealed at the end of September, that would detail asset disposals that could make the company a more solid credit with an ability to make good on their policies on financial instruments. It would also be able to access capital in the markets once those illiquid assets were disposed of.

Unfortunately, what AIG didn't know, and the SEC didn't either, is that AIG the stock is different -- and worse -- than AIG the company. The stock could not be insulated with a firebreak from short-sellers who knew that if you broke the stock's back, you broke the company's back.

Read the full version of

Cramer: SEC Played a Big Role

.

So how did AIG get to its current state of scrambling for survival? The following are recent insights from

TheStreet.com

-- specifically when AIG's CEO resigned in June.

Monday, June 16

From

AIG's Sullivan Is Latest Credit Casualty

:

The fallout from the subprime meltdown and related credit crisis has claimed another corporate chieftain.

Martin Sullivan has resigned as CEO of American International Group and will be replaced by AIG Chairman Robert Willumstad. Stephen Bollenbach, an AIG director and a former CEO of Hilton Hotels, was named lead director.

The insurance giant's board held a special meeting this weekend to consider Sullivan's fate. Sullivan had come under fire over the past month, after AIG raised $20 billion to cover $7.81 billion in first-quarter losses tied to writedowns on its portfolio of credit derivatives and mortgage-related products.

Read the full article.

From

Cramer: AIG's Got More Problems

(Video, Jun. 16):

The CEO switch will do little to turn around the insurance giant, says Jim Cramer.

Cramer: "You go back to that December 6th meeting and you realize that what you've got here is just an unfathomably bad portfolio...

AIG is a company that spent a full day

Dec. 6, 2007 explaining to you why they had no problems and then six months later, it looks like they may be the worst

company in the financial sector. This is a company that raised the dividend. Now they got to get rid of the dividend, if you ask me. This is a company that assured you that it could buy back shares as it had great liquidity. Now it doesn't have any liquidity... this is a really deeply troubled company and I think they need to do two or three more financings... one of the things we learn is that when you need more financing, your stock goes lower."

To watch the video, click the player below:

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Plus, don't miss these earlier

Wall Street Confidential

videos with Cramer:

I've Been Too Upbeat On Wachovia, AIG

(May 28: The financials are going to need lots more money to keep them going, warns Jim Cramer.),

SEC Needs to Investigate AIG

(May 20: Cramer says that in light of the December

2007 analyst meeting webcast from AIG, the company's calculations were dead wrong -- and this is so unacceptable he calls for an SEC investigation.),

AIG's Sullivan's Gotta Go

(Feb. 12: Hear Jim Cramer's thoughts on the latest AIG scandal.) and

AIG Got Cocky, Got Caught

(Feb. 11: The insurer's auditing probe is a result of judgments on data that could not be modeled, says Cramer.).

From

AIG Lending Unit Could Bring More Pain

:

AIG officials have noted that mortgage lender American General Finance, which the insurer acquired for $23 billion as the housing boom started to ramp up in 2001, has contributed to its recent problems. But despite AIG's insistence that American General's underwriting standards were conservative, a longtime branch manager in Southern California tells

TheStreet.com

a different story.

According to the source, who requested anonymity for fear of reprisals from his former employer, American General was aggressively involved in the predatory lending tactics and delinquent underwriting standards that led to financial disaster and a storm of public criticism at subprime mortgage giants like

Countrywide Financial

.

Read the full article.

From

AIG Ouster Offers Two Lessons, No Hope

:

Normally, when a high-profile CEO flames out, investors can reliably draw a single lasting lesson from the misfortune. Never a normal company, when American International Group, God Bless it, dumped its second CEO in recent times this weekend, it imparted two lasting lessons.

The first is an old stand-by: Don't believe nice stuff written about a new CEO right when he is appointed, especially if he replaces a discredited leader and especially if he served for years as a lackey for that discredited leader. The times probably ain't a changin' if the creepy old guard handpicks their creepy successor.

Read the full article.

Image placeholder title

They Just Don't Get AIG! (Video, Sept. 16)

Marek Fuchs tries to comprehend the "comprehensive" AIG rescue plan --without much help from the business media.

Watch the video on TheStreet.com TV

.

Plus, don't miss these AIG-focused videos by Fuchs:

They Just Don't Get AIG!

(Video, Jun. 16: Marek Fuchs explains the fatally flawed coverage of AIG, which shares similarities with coverage of

Apple

(AAPL) - Get Report

and

They Just Don't Get AIG!

(Video, Feb. 12: Fuchs gets in a huff over how AIG's claims of purity were swallowed by the gullibles in the business media.)

Plus, don't miss:

AIG in 'Crisis,' Ex-Chief Says (May 12: Maurice 'Hank' Greenberg asked the insurer's board to postpone its annual meeting this week, after its $7.8 billion first-quarter loss.)

Understanding the Financial Sector: Insurance Companies (Mar. 27: Scott Rothbort explains that while insurance company profits have historically been invested in stocks, bonds and real estate, recently, insurers such as AIG have tried to "increase the yield on their returns by investing in the sub-prime mortgage markets and mortgage-backed securities. In doing so, they assumed far greater risk than in the past and are now feeling the pain of the credit crisis as they take huge write-downs on their investment portfolios.")

To stay up to date on AIG and other companies in crisis, bookmark and vist

TheStreet.com's

On the Brink section

.

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This article was written by a staff member of TheStreet.com.