Over the years, all sorts of unorthodox predictors have emerged to signal that a company is in financial trouble.

A fish tank in the reception was long held by some accountants to be a harbinger of bad news.

More recently, any corporate links to the business body the CBI could foretell trouble ahead.

If a company chairman was appointed president of the CBI, the fear was his own business could soon be on course for the rocks.

Take Rentokil, a stock market darling until its boss Sir Clive Thompson took the helm at the CBI in 1998.

Crunch-prone clubs?

But has the credit crunch produced the best new indicator yet – the tell-tale football shirt sponsorship deal?

Just consider the evidence. When Manchester United signed up with AIG two years ago, could the Old Trafford side have foreseen that the US insurance giant would soon be teetering on the edge of financial oblivion?

An outcome which can only tarnish the image of the Red Devils, by association.

There are uncanny parallels elsewhere. Newcastle United is inexorably linked with the biggest banking failure Britain has seen in 150 years, Northern Rock.

Failed bank Northern Rock sponsors Mike Ashley’s Newcastle United

The bank’s name is still proudly displayed on the black-and-white striped shirts of the Toon Army – given the parlous state of the both the club and sponsor the link seems strangely apt.

West Ham are now sponsor-less, having hitched their wagon to XL Travel, which crashed in spectacular fashion last week stranding thousands of tourists abroad.

The Upton Park side has now ditched the XL name, presumably it does not want to be associated with a company which has bought misery to thousands.

Although some Hammers fans may think their sponsor’s legacy corresponds to some of their team’s more woeful performances.

Added together, it suggests that a number of England’s leading clubs have become little walking adverts for credit crunch casualties.

Unluckiest club

And tracing back through the records, the trend has been around for some time.

Manchester City must have rued its links with the insurance company First Advice, part of the ill-fated Accident Group which collapsed in 2002, and sacked all its staff by text.

And the implosion of MG Rover brought a premature end to its links with Aston Villa in 2004.

But the club that seems to have the least luck with sponsors is Charlton Athletic. During its premiership days, the south London side teamed up with Allsports, the sports good retailer which crashed into administration in 2005.

Charlton bounced back signing up Llanera, a property firm specialising in the Spanish market. But that deal blew up last autumn when Llanera collapsed owing £500 million, ironically because it failed to reach agreement on re-financing with a number of banks including Lehman Brothers.

Given the failure of analysts to predict many recent corporate casualties, some might think they would do worse than closely monitor the activities of those firms that sponsor football clubs.

After all, who knows where “the curse of the shirt” will strike next?

News reported by The BBC

Asian markets have staged a tentative recovery in response to the US government rescue of insurance giant AIG, but investors remain nervous.

Stocks in Tokyo, Taipei, and Seoul all rose, although share prices in Hong Kong and Australia lost ground after starting higher.

The dollar also rose against major currencies.

Investors are concerned that financial markets will remain unstable after the dramatic events of the past few days.

AIG’s bail-out follows the collapse of US investment giant Lehman Brothers, which caused share prices to plummet across the world’s financial markets.

Another investment bank, Merrill Lynch, has been sold off to Bank of America.

Japan’s Nikkei 225 index ended up 1.2% at 11,749.79, after hitting a three-year low on Tuesday. The index had earlier rose as much as 2.3%.

Hong Kong’s Hang Seng index was down 1.85% at 17,691.2 points after earlier rising as high 18,699.18.

European markets are expected to open slightly higher amid relief that AIG wasn’t allowed to go bankrupt.

News reported by The BBC

Ken Lewis, the chief executive of Bank of America, said yesterday that “I don’t know of a major bank that doesn’t have some significant exposure to AIG”.

So AIG’s need to raise billions in new capital to shore itself up has sent shockwaves through global markets and helped to undermined the share prices of many banks.

But how exactly are banks “exposed” to AIG?

Light is shed by an insightful bit of research by Sandy Chen of Panmure Gordon.

He has found the following paragraph in AIG’s US regulatory filing:

“Approximately $307bn (consisting of corporate loans and prime residential mortgages) of the $441bn in notional exposure of AIGFP’s super senior credit default swap portfolio as of June 30, 2008 represented derivatives written for financial institutions, principally in Europe, for the purpose of providing regulatory capital relief rather than risk mitigation. In exchange for a minimum guaranteed fee, the counterparties receive credit protection with respect to diversified loan portfolios they own, thus improving their regulatory capital position.”

If you managed to read to the end of that, your reaction is probably “you what?”

Well, I’ll tell you what.

AIG is saying here that it has insured $307bn of corporate loans and prime residential mortgages that are on the balance sheets of banks, mostly European banks.

The banks have bought this insurance to protect themselves against the risk that these loans would go bad, that borrowers would default.

Their motive for doing so was to reassure their respective regulators – such as the FSA for UK banks – that these loans are of minimal risk.

And the benefit of doing that was that they could lend considerably more relative to their capital resources.

But if AIG is in trouble, then doubts arise about whether it would be able to honour the financial commitments it has made through these insurance contracts (which, for those of you who like to learn the lingo, are called super senior credit default swaps).

In fact, in a wholly mechanistic way, the downgrades of AIG’s credit rating that we saw last night automatically increased the perceived riskiness of loans made by banks that have insured credit with AIG.

Which means those banks’ balance sheets become weaker – and that could mean that they’ll be forced by their regulators to raise additional capital.

So there’s a widespread view among bankers that the US Treasury and the Federal Reserve simply can’t allow AIG to fail, in the way that they felt that they could allow Lehman to collapse into insolvency.

If AIG went down, a number of banks’ balance sheets would be mullered – there would a dangerous risk to the stability of the global financial system.

Or to put it another way, AIG is so pivotal in the global financial system, it can’t be consigned to the dustbin of history in a precipitous way.

PS. For those of you who currently have the willies about HBOS, its exposure to AIG is not life threatening.

What’s currently doing for HBOS’s share price is blindingly obvious: it provides 20% of all UK residential mortgages; the UK housing market is the major vulnerability of the UK economy; if there’s a sharp rise in the number of homeowners defaulting on their mortgages, HBOS would incur significant losses, especially on self-cert, buy-to-let and loans with a high loan-to-value ratio.

But HBOS has recently raised £4bn of new capital to cushion itself against the impact of just such a debacle.

So there is more fear than reason underlying the success of the short-sellers in driving down HBOS’s share price – although the short-sellers will claim a modest victory in the decision by Standard & Poors to lower HBOS’s credit ratings by a smidgeon.

But HBOS’s ratings remain pretty strong. And the rating cuts shouldn’t lead to a sharp increase in the cost of its finance or to an exodus of those who provide that finance.

UPDATE 19:25

I suspect that Sandy Chen has found only a part of AIG’s credit protection business, since I am told that US banks are more exposed to AIG than are European banks (which is not what the regulatory filing spotted by Chen shows).

And here’s a compelling wrinkle. AIG writes its credit default swaps contracts (its loan insurance business) through a French banking subsidiary.

Even so, the possible collapse of AIG isn’t a French problem. What AIG needs to obtain is financial support from the American taxpayer at the top holding company level in the US – and it would then use these funds to recapitalise the French bank it owns.

What this shows is the fearful complexity of AIG’s corporate structure, which just adds to the difficulty in negotiating a rescue.

News reported by The BBC

Concerns are mounting about the future of US insurance giant AIG as investors fear a domino effect in the aftermath of Lehman Brothers’ collapse.

Credit ratings agencies, which assess the riskiness of debt, have downgraded AIG – making it more difficult for the firm to borrow money.

On Monday, the insurer was a thrown a $20bn (£11.2bn) lifeline from New York state authorities.

But reports said it may need further capital for its business to survive.

Shares of AIG sank 61% on Monday to close at $4.76.

Wide influence

AIG is under pressure to raise capital after posting three quarterly losses in a row totalling $18.5bn (£10.3bn).

Reports said that AIG was meeting the US Federal Reserve and investors overnight to come up with another funding facility.

Ratings agencies Moody’s and Standard & Poor’s downgraded ratings on AIG debt on Monday.

AIG is much more than an insurance company. It also has a financial products division that acts like an investment bank and is at the heart of many of the firm’s current problems.

“Its tentacles reach into every part of the economy,” Matthew Bishop of the Economist told the BBC.

He said the consequences of the firm’s collapse would be devastating for the financial system.

“It’s worse than insurance policies not being valid. They are writing derivative contracts and these have the potential to leave a lot of other banks holding massive losses that they will have to deal with.”

AIG – KEY FACTS
Employs 115,000 people in more than 100 countries
Employs 3,000 people in the UK
Founded in 1919 in Shanghai
Now based in New York
Source: AIG, Daily Telegraph

Many of AIG’s problems are thought to stem from credit default swaps, which insure against companies going bust.

Sir Howard Davies, former chairman of the Financial Services Authority in the UK and a board member of Morgan Stanley, said that the US would be reluctant to let AIG collapse.

“AIG is absolutely enormous. It would create knock-on consequences in insurance markets,” he said.

“It is huge in China for example. That would export the American financial crisis there so it would have all kinds of political consequences.”

In the UK, AIG is best known as the sponsor of Manchester United. It also sells insurance policies through Argos and Boots.

News reported by The BBC