AIG’s made it through today

AIG may not be alive and well, but it is still functioning. That’s the good news.
The real news is the source of the financial lifeline thrown to the big insurer – the state of New York. Gov David Paterson has authorized AIG to access $20 billion in capital currently locked up in subsidiary companies to increase the company’s liquidity (free cash on hand). The Governor’s permission essentially gave AIG more capital from internal sources, capital that the company had been desperately seeking (with little luck) from outside backers.
The $20 billion is half of the company’s immediate cash needs; sources indicate the firm is also looking to sell assets to come up with the other $20 billion. Tops on that list may be the General American, the auto insurance business, and AIG’s aircraft leasing subsidiary, long one of the company’s most profitable ventures, which would generate between $7 and $14 billion in proceeds.
The problem with selling International Lease Finance Corp. (the aircraft finance arm) is it is very profitable, generates lots of cash, and is particularly advantageous for AIG due to tax matters. ILFC buys aircraft and leases them to airlines, taking deductions for depreciation and other expenses that it can use to offset earnings – deductions that are more valuable for AIG than they would be to another owner.
AIG would very much like to hold onto ILFC, and it is just possible it will be able to do so. The Fed hired Morgan Stanley to help figure out what to do about AIG, and at this point it looks like the recommendation, and possible short term solution, is for Morgan to put together a pool of capital from JPMorgan Chase and Goldman Sachs to help AIG survive the current liquidity crisis.
And just to make the situation even more difficult, reserves for claims from Ike will also be hitting AIG’s financial statements in the next few weeks. While it is too early to tell precisely what AIG’s exposure may be, the company is one of the ‘second tier’ carriers in terms of property market share in that area, a position that will likely result in substantial claims costs.