Dear Council Member,

This morning brought news that financial giant AIG was looking to borrow money from the Federal Reserve in order to stave off a possible downgrade. The Council is closely following developments on this issue. I spoke today to Mark Willis, Executive Vice President at AIG Commercial Insurance, and we will be sharing with you the most up-to-date information that we have on the situation. Here is what we know now:
 
This afternoon, New York Gov. David Paterson said that he has asked state insurance regulators to permit AIG to use $20 billion in subsidiary company assets to provide a "bridge loan" to itself.  He said this action came in response to a request from AIG.  Paterson characterized AIG's situation as a "liquidity problem" and said the company remains "extraordinarily solvent." He has also asked New York Insurance Superintendent Eric Dinallo to speak with the Fed regarding additional loans to AIG. 
 
This action caps off three days of furious action at the company and regulatory levels, after S&P said on Friday, Sept. 12 there was a possibility it may downgrade AIG's credit ratings one to three notches because of concerns about AIG's access to capital.
 
A Credit Suisse research report issued today noted that most of AIG's securities lending is located in its insurance operations, which could mitigate liquidity issues at the holding company level.  However, if counterparties look to unwind these contracts, this will place additional pressure on AIG's corporate liquidity.  It further noted that even if AIG were able to sell certain businesses, it would still need alternative financing until it received the proceeds of these sales.  AIG has access to $20 billion of backup credit facilities and $18 billion of dividend capacity from its insurance operations.  However, it is unclear if regulators would want to limit the dividend flows in the face of diminished capital adequacy.
 
Also today, Citigroup analyst Joshua Shanker said in a note that AIG could report writedowns of $30 billion if the Lehman Brothers bankruptcy leads to distressed sales of AIG's mortgage assets, which will in turn further lower AIG's market value. 
 
We will continue to monitor this situation and bring you the latest news as we receive it. We will share what we have gathered as the day progresses so that you can keep your clients up to date as well.
 
Sincerely,

Ken A. Crerar
President