Financial Turmoil at AIG, Lehman, Merrill Lynch and others

The weekend meltdown of Lehman Brothers, surprise merger of Bank of America and Merrill Lynch, and AIG desperately seeking a capital infusion rocked both Wall Street and my own sense of well-being.

I don’t watch much TV on Sundays but was riveted as I watched the unbelievable events unfold. Late last night I was shocked to hear AIG was looking to the Fed to provide $40B in bridge financing. I didn’t even know they could tap the Fed for something like that. It just seems unreal to me that AIG’s balance sheet could be in such trouble.

Quoting from the WSJ of 9-15-08:

Insurer American International Group Inc., succumbing to relentless investor pressure that drove its shares down 31% on Friday – and another 41% on Monday – is pulling together a survival plan that includes selling off some of its most valuable assets, raising more capital and going to the Federal Reserve for help, people familiar with the situation said.

The measures are aimed at staving off a downgrade by major credit-rating firms. AIG executives worried that such an action would set off a chain reaction that could be fatal to the firm. The insurer, which has already raised $20 billion in fresh capital so far this year, was seeking to raise an additional $40 billion to avoid a downgrade.

During a weekend scramble to shore up its finances, AIG turned down a capital infusion from a group of private-equity firms led by J.C. Flowers & Co. because an option tied to the offer would have effectively given them control of the company, an 89-year-old giant that does business in nearly every corner of the world.

The proposed option would have allowed the firms to acquire AIG for $8 billion under certain conditions. That price is just one-fourth of AIG’s current market value.

J.C. Flowers didn’t respond to messages seeking comment.

When AIG’s board rejected the capital infusion, the company’s recently appointed chairman and chief executive, Robert Willumstad, took the extraordinary step of reaching out to the Federal Reserve for help. Mr. Willumstad asked New York Federal Reserve President Timothy Geithner if the Fed could backstop some asset sales.

Two other private-equity firms — Kohlberg Kravis Roberts & Co. and TPG — offered to inject capital into AIG if the Fed agreed to provide the insurer with a bridge loan until its restructuring plan was completed.

AIG viewed the request to the Fed not as a bailout but rather as a temporary measure that would give the insurer some breathing room until it was able to dispose of the assets.

As of right now, AIG stock is down 42%, Bank of America stock is down 13% and Merrill stock is up 27%. Overall the DOW is down 295 points or 2.58%. AIG stock is down over 90% off its 52 week high.

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