We're with AIG!

Some of you might recall the commercial where a little boy shows up at his parents’ bedroom door. The mom asks, “what’s wrong, did you have a nightmare?”, and the boy responds by saying “No, I’m concerned about this family’s financial future”, and he rattles off a variety of issues facing all of us: retirement plan predictability; supplemental health insurance; estate planning; and car insurance. Finally, the father responds, “Buddy, we’re with AIG!”, and the boy says ‘Oh, don’t get up, I’ll tuck myself in.’ (Watch Video)

Well, that poor little boy IS having nightmares and the term “We’re with AIG!” took on a whole new meaning this week. The market value of one of the world’s largest companies plummeted this week as AIG sought to raise capital to post additional collateral on their outstanding obligations.

AIG is one of the largest insurers for the obligations of other companies. The instruments are called Credit Default Swaps and many investors, including hedge funds, buy these CDS’s as insurance against a company defaulting on any of their debt. With the housing and credit crisis causing many firms to collapse or otherwise default on their payments, AIG has been on the hook as the insurer, causing both S&P and Moody’s to downgrade AIG.

Once a company is downgraded, many of the creditors can ask the company to post additional collateral and in the case of AIG, that additional collateral was initially estimated to be $15 billion or higher. With a lower credit rating and a stock price approaching zero, AIG has been left with very few options to raise the needed capital. That is why the FED, the Governor of NY, and several others were scrambling to figure out how to resolve the issue. Meanwhile, the share price for AIG continues to spiral downward. Without a resolution, AIG will be forced to file for bankruptcy and the potential of a systemic shock across the globe would be imminent.

The fear arises from the fact that AIG equity and debt is very widely held by institutions all over the world. It has operations in over 130 countries and if these securities are deemed worthless, there is the possibility of more writedowns, additional downgrades, and mounting liquidity issues.

So in order to reduce the probability of a global meltdown and asset writedowns for many of the money market mutual funds that hold AIG debt, the verdict is that AIG will receive an $85 billion loan from you, me, and every other person that pays taxes, and the US government will own 79.9% of AIG. The result is an extension of a wedding between two mortgage giants, consummated earlier this month, and includes a diversified insurance company to boot (kind of like a mother-in-law that you weren’t counting on!) A much more exotic combination, for sure! Can you say ménage ‘a trios?

Don’t get up, I’ll tuck myself in!!