Crisis threatens insurance giant
Posted by admin on 16 September, 2008 under Business news | 
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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.
