Because of trees felled last night as Ike’s remnants swept through Ohio, I was unable to make it to the office today. I spent more or less the entire day on the telephone talking about AIG, looking out at my yard strewn with fallen tree limbs, branches, twigs and leaves – a visually suitable tableau give the winds that ripped through Wall Street over the last 48 hours.
With respect to AIG, can I just say that today’s mainstream media coverage regarding AIG was absolutely terrible? For most of the day, various news reports seemed to suggest that New York insurance regulators had authorized AIG’s insurance subsidiaries to loan the parent company $20 billion. However, when the transcript of New York Governor David Paterson’s Monday afternoon press conference (here) was later made available on the Governor’s website, it became clear that what the regulators had authorized was quite a bit different than depicted in the media.
As the transcript explains (if you read the whole thing), the regulators have authorized an "asset swap." The idea is that the insurance subsidiaries are swapping the more liquid assets they hold for less liquid assets of equal or greater value held by the parent company, so that the parent company can post the liquid assets as collateral. The transaction is further explained in a CFO.com article here.
The governor himself noted that this swap transaction alone is not sufficient to see AIG through this current crisis, as the working number for AIG’s current requirements is $40 billion. Much about the asset swap transaction "depends" – that is, it depends on the company’s ability to raise the additional funds it requires, it depends on the actual assets that are transferred, it depends on what further capital requirements AIG may have in this rapidly changing environment.
The critical question of the sufficiency of policyholder protection in light of the asset swap will depend on the quality of the assets exchanged. One can hope that given what is at stake that there is a great deal of transparency concerning the assets the insurance subsidiaries receive. Given the regulators’ involvement, one can also hope that policyholders’ interests will not be subordinated to the interests of AIG’s shareholders or bondholders.
In the final analysis, AIG’s ultimate circumstances may finally depend on what the credit rating agencies do. CNN is reporting tonight (here) that Fitch’s has already downgraded AIG’s financial ratings, which potentially could trigger significant additional collateral requirements on the AIG’s credit default swap contracts, perhaps as much as $13.3 billion. The specifics regarding the Fitch downgrades can be found here. Following suit, S&P has also downgraded AIG's counterparty and financial strength ratings (refer here), with the lowered ratings remaining on credit watch "with negative implications." Apparently the downgrades fully considered the potential benefits to AIG as a result of the asset swap transaction.
Perhaps of equally significant (if not greater) concern to readers of this blog is the action this evening by A.M. Best’s to downgrade AIG’s property/casualty insurance financial strength rating to A (Excellent) from A+ (Superior), about which refer here.
There will be further material developments ahead. The ultimate outcome remains to be seen. The company itself did not publicly comment as these events unfolded today, but some reports suggest that there will be a company statement prior to the opening of the markets tomorrow.
About Lehman: At the same time as AIG’s struggles, the details of Lehman’s demise have started to emerge, starting with the company’s Monday morning bankruptcy petition, which can be found here. The Dealbreaker blog has distilled some of the more interesting tidbits from the petition, here.
A more scholarly look at the Lehman petition can be found on the Bankruptcy Litigation Blog (here), which notes that the petition bears the indicia of having been prepared in haste. The blog also notes that as a result of recent bankruptcy law revisions, Lehman’s petition may face some rather complicated challenges. (Hat tip to Francis Pileggi of the Delaware Corporate and Commercial Litigation Blog, here, for the link to the Bankruptcy Litigation Blog.)
Roger Parloff also discusses on the Legal Pad blog (here) the challenges that Lehman’s petition presents. As statements Parloff quotes on his blog make clear, Lehman may not be able to enjoy one of the primary benefits usually available to company’s filing a bankruptcy petition, the automatic stay. Bankruptcy laws relating exclusively to investment banks provide that Lehman’s transaction counterparties can now, even after the petition filing, seek to terminate their contracts with Lehman, which could further exacerbate the current distress.
And on another note, CFO.com has an interesting article (here) asking the question whether Lehman’s creditors can try to recoup the $5.7 billion in bonuses that Lehman paid its employees in December 2007.
The damage from Lehman’s collapse will be widespread, as investors holding its shares and even its debt securities will likely see little or nothing on their investment. This asset wipeout comes on the heels of the Fannie Mae and Freddie Mac takeout, and at the same time as the precipitous decline in AIG’s shares. All of this means that in a few short days a significant chunk of asset valuation has disappeared (and that is not even counting the overall decline in market values today). These investment losses are going to hit a lot of other companies, not to mention pensions, mutual funds, hedge funds, other insurance companies, endowment funds and so on. These losses will have to be reckoned in the weeks and months to come.
The extent of the consequences from these events may be difficult to foresee even now, though the events have been widely reported. Who could have foreseen that when Ike came roaring ashore early Saturday morning in Galveston that on Monday morning trees would be down all over Northeast Ohio?
For Those Who Can’t Wait: If you are (like me) one of those people who need to know what it all means, you will want to refer to Professor Davidoff’s overview on the Dealbook blog (here). An analysis that takes a darker, more cynical view of these events can be found on The Big Picture blog (here).