AIG planning big spinoff

Nation's largest insurer will unveil restructuring effort on Monday as company races to raise cash and avoid credit downgrades.

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By Tami Luhby, senior writer


NEW YORK ( -- American International Group, the nation's largest insurer, plans to unveil a restructuring plan as soon as Monday morning that will include selling off part of its business to raise desperately needed cash and boost investors' confidence, according to published reports.

AIG has been rocked by the subprime mortgage crisis, losing more than $18 billion in the past nine months, and faces the possibility of having its credit ratings cut if it does not raise capital soon.

The company, which is a component of the benchmark Dow Jones Industrial Average, is also said to have turned to the Federal Reserve for an emergency loan.

The New York Times reported late Sunday night that the company is seeking a $40 billion bridge loan from the Federal Reserve. A source close to the firm said that if AIG does not raise cash and is downgraded by ratings agencies, it may have only 48 to 72 hours to survive.

Separately, The Wall Street Journal reported Sunday that AIG is likely to sell its annuities unit and shed its domestic auto insurance business. It may also look to dispose of its aircraft-leasing arm, International Lease Finance Corp., which has a fleet of more than 900 airplanes valued at more than $50 billion.

The aircraft unit is the largest single customer of both Boeing Co. (BA, Fortune 500) and European Aeronautic Defence & Space Co.'s Airbus.

AIG may also shift assets from its insurance company to its holding company to help the company respond to customer demands, the Journal reported. All told, these measures involve between $40 billion and $50 billion in capital raising and reallocation.

AIG spokesman Nicholas Ashooh told on Sunday: "We're working hard on a range of options, but have not announced anything and don't know when we will."

The ailing company, which had planned to announce a turnaround strategy on Sept. 25, is being forced to accelerate the announcement after investors fled the stock last week.

Shares fell 31% on Friday after plummeting earlier in the week. The company's stock is down a total of 79% this year.

AIG (AIG, Fortune 500), which already raised $20 billion in fresh capital earlier this year, has been pummeled by three quarters of huge losses and writedowns. The company has reported more than $18 billion in losses in the past nine months.

Its troubles stem from its sales of credit default swaps - insurance-like contracts that guarantee against a company defaulting on its debt - and from its subprime mortgage-backed securities holdings.

AIG has written down the value of the credit default swaps by $14.7 billion, pre-tax, in the first two quarters of this year and has had to write down the value of its mortgage-backed securities as the housing market soured.

This year's results have also included $12.2 billion in pre-tax write downs, primarily because of "severe, rapid declines" in certain mortgage-backed securities and other investments.

Credit ratings agency Standard & Poor's warned late Friday that it might downgrade AIG's debt, citing concerns about the company's access to capital following its share price decline.

A downgrade would make it more expensive for AIG to issue debt and harder for it to regain the confidence of investors.

"We believe that AIG has sufficient capital and liquidity to meet its policy obligations and potential collateral requirements, which are significantly greater than the expected cash losses on the mortgage-related assets," said Standard & Poor's credit analyst Rodney Clark. "However, additional market value losses will place some strain on the company's resources."

AIG has struggled all year as the Wall Street credit crunch took its toll.

In June, the company tossed out its chief executive, Martin Sullivan, who had been charged with turning the company around after directors removed longtime CEO Hank Greenberg in 2005. Greenberg was the target of one of then-Attorney General Eliot Spitzer's investigations.

The board named AIG chairman Robert B. Willumstad, who joined AIG in 2006 after serving as president and chief operating officer of Citigroup (C, Fortune 500), to replace Sullivan as chief executive officer.

Though AIG's problems have been apparent for months, it is coming under fire now because of Wall Street's increasing skittishness over Lehman Brothers, also a big player in credit default swaps, said Chip MacDonald, partner in the capital markets group at Jones Day, a law firm.

"It's the lack of transparency and clarity about their business," MacDonald said. "In today's environment, everyone is assuming the worst so they are forcing AIG to come out with a plan sooner rather than later."

However, McDonald noted, AIG is not in as vulnerable a position as other financial institutions because of its core insurance business. Customers cannot simply withdraw their deposits, as they can at a bank.

"It's a little harder to make a run on an insurance company," McDonald said. To top of page

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