AIG Downgrades, Stock Plunges 42%

123jump.com Staff
16 Sep, 2008
New York City

Several ratings agencies lowered their ratings and views of credit derivative counterparty risk level for AIG. Investors quickly reacted to the downgrades and sold AIG stock. AIG plunged 42% as the lowered ratings willl only force th battered insurer to raise additional $11 billion. AIG has been in contact with the Fed to raise emergency loan after the company and private investors failed to agree on terms.

[R]10:30AM New York – AIG plunges as it battles ratings downgrades and liquidity and confidence crisis.[/R]

AIG, the world’s largest insurance company by asset plunged 40% after it lost 61% of its value in yesterday’s trading. Investors fear that AIG may be the next financial institution to fail. The 89-year old insurance company has global presence and more than 150 largest banks around the world do business with the insurance company.

Ratings agencies downgraded counterparty ratings for the short term and long terms exposures. S&P lowered its rating to A-, Moody’s lowered its rating for senior unsecured debts to A2 level and Fitch reduced its rating to A level from AA-.

AIG stock plunges on the ratings downgrades and dissipating confidence among investors. AIG (AIG)) plunged $2.41 to $2.27 on trading volume of 247 million shares at 10:15 am.

The credit default swap which insures AIG debt rose sharply to a level that most market watchers estimate only companies that are likely to default have to pay. The cost of protecting $10 million AIG debt rose to $5.2 million from $3.3 million on Monday and additional cost of 0.5 million according to Phoenix Partners Group and reported by Thomson Reuters.

The latest rating downgrade will force AIG to come up with additional collateral or preferably capital to continue the derivative business operations. The insurer is seeking $70 billion of capital with the help of Goldman Sachs and JP Morgan. However, the lowered rating may force the company to raise additional $11 billion to $15 billion.

The growing liquidity crunch at AIG has been restricting the company’s ability to raise capital and conduct business as the cost of capital increases and investors shy away from the lack of transparency in its portfolio of assets.

Over the weekend talks with Berkshire Hathaway and several private equities companies broke down after the investors demanded majority control of the company. AIG was forced to ask for a bridge loan from the Federal Reserve Bank on Sunday. Since then, the Fed has hired Morgan Stanley to review the different options and risks to financial system.

Goldman Sachs ((GS)) dropped $12.71 or 9.40% to $122.73 after it reported 70% decline in earnings. Morgan Stanley ((MS)) dropped $2.55 or 7.9% to $29.64.