Zazzle Shop

Screen printing

Monday, September 15, 2008

Clock is ticking at AIG- raising Billions to deleverage

AIG (AIG) chief Robert Willumstad faces a tough early test Monday morning. AIG shares plunged 38% in early trading Monday, as investors wait to see whether Willumstad - who took over as CEO of the giant insurer just three months ago - can present a credible plan to reduce risk and raise new capital. Willumstad had planned to wait till Sept. 25 to unveil the findings of his strategic review, but his hand now seems to have been forced by events over the weekend, notably Lehman Brothers’ (LEH) bankruptcy filing.

Shares of Lehman plunged 80% in early trading Monday, dropping below a dollar a share, as investors realize their shares are likely to be worthless. It was just last week that Lehman chief Dick Fuld announced a plan to reduce the brokerage firm’s mortgage-related risk - a plan that was rejected in the market as the latest instance of the firm making promises rather than taking action, however painful.

Willumstad is surely looking at the Lehman announcement as an example of what not to do, but whether he can find buyers for assets he wants to sell or investors who want to invest at nonpunitive rates is another question. AIG reportedly rejected a lowball offer over the weekend from private equity firm J.C. Flowers, and representatives of its biggest shareholder, deposed ex-CEO Hank Greenberg, say AIG hasn’t reached out - even as execs reportedly approached the Fed for a $40 billion bridge loan to see them through the potential-downgrade crisis.

Further complicating the picture for AIG and other financials is the wave of writedowns that’s likely to result from Lehman’s collapse. “Due to the liquidation of an unprecedented scale, we expect a broad-based decline in marks on asset values within the financial markets,” Oppenheimer analyst Meredith Whitney wrote late Sunday. “The liquidation of LEH’s assets will force the other brokers to mark down their assets accordingly and therefore pressure all capital ratios.” She adds, a propos of the steep decline of the stock futures markets in early trading Monday, that she expects financial markets “to be under unprecedented strain over the next several days as players respond to outsized industry deleveraging.”