AIG gets NY state help to stave off cash crunch

NEW YORK (Reuters) - A complex asset swap brokered by New York state officials will give embattled American International Group a $20 billion lifeline, but the insurer's longer term rescue plan will depend on additional funding.

JPMorgan and Goldman Sachs are exploring putting together a syndicated $70 billion to $75 billion credit facility for AIG, among other options, one person familiar with the matter said on Monday.

The banks' efforts are supported by the Federal Reserve, which AIG appealed to for assistance late on Sunday -- one of Wall Street's most tumultuous days ever, with Lehman Brothers Holdings Inc on the verge of collapse and Bank of America moving to take over Merrill Lynch & Co.

AIG turned to the Fed after unsuccessful negotiations with several private equity firms and Warren Buffett's Berkshire Hathaway.

AIG's troubles, much like those of some of its Wall Street peers, stem from guarantees it wrote on mortgage-linked derivatives that have left it with a total of $18 billion in losses over the past three quarters.

AIG in recent days has explored a wide range of options to shore up capital and avoid rating cuts, but the three top global rating agencies downgraded anyway, and warned more downgrades could follow, potentially making it harder and more expensive for AIG to raise new capital.

Moody's Investors Service cut AIG's rating to A2 from Aa3, a two-notch downgrade. Standard & Poor's Ratings Services lowered the rating to A-minus from AA-minus, a three-peg reduction and Fitch Ratings reduced its standing to A from AA-minus, a two notch cut.

Robert Youngman, president of New York-based Griffin Asset Management and a former executive at AIG, had hoped the insurer could secure the additional credit facility before being downgraded. "The real problem is if ratings are cut," he said, before the two downgrades were announced.

Youngman holds about 350,000 AIG shares through family stakes and on behalf of clients.

"Time is the most important thing that AIG needs to solve its problems right now," he added.

The company has said it is exploring asset sales as another way to boost capital, and many expected the company to disclose details of those plans on Monday but were disappointed.

AIG's shares ended down 61 percent at $4.76 a share on Friday, on Wall Street's worst day since markets reopened after the September 11 attacks, with stocks driven lower after Lehman filed for bankruptcy and Merrill Lynch accepted a takeover.

DOWN TO THE WIRE

"AIG seems to be the next guy on the chopping block," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey.

New York Gov. David Paterson at a press conference on Monday said state officials agreed to ease restrictions on assets ring-fenced within AIG's insurance operations, allowing the firm in effect to provide itself bridge financing.

But the development -- which is at no cost to taxpayers -- leaves insurance policyholder obligations backed by harder-to-sell assets.

"It may be undesirable, but if they were not doing it, and AIG were to go under, that would be a minus," Youngman said of the move by the state.

Paterson said his interest in working with AIG was to help save New York jobs. The insurer employs 6,000 in Manhattan and 8,600 statewide. Worldwide, it employs 116,000.

"New York would like to maintain them (AIG) if we can as they are critically important to us," he added.

One person AIG had not turned to for help was its largest shareholder and former chief executive, Maurice "Hank" Greenberg.

Spokesman Glen Rochkind on Sunday said Greenberg had offered to help in any way he could but had not been called upon.

Greenberg, through a personal stake, family trusts and companies he controls, has a block of AIG stock equal to almost 12 percent of AIG's outstanding shares.

According to Reuters data, the stake lost $5.2 billion this month alone as shares plummeted.

"He's by far the biggest loser in this whole thing," said Ron Shelp, author of "Fallen Giant," a study of Greenberg and AIG. "But I think it impacts him in a way other than money. He spent over 40 years working for AIG, he built it into the world's biggest insurance company, that's his legacy."

Greenberg, through his spokesman, declined to comment.

The octogenarian parted ways with AIG in 2005, amid an accounting scandal. He continues to run several firms that were once affiliated with AIG.

(Additional reporting by Karen Brettell, Paritosh Bansal, Jonathan Stempel, Joseph Giannone, Jennifer Ablan, Juan Lagorio and Dan Wilchins in NEW YORK and Mark Felsenthal in WASHINGTON; Editing by Ian Geoghegan)