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September 16th, 2008

Keeping an Eye On AIG

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One of the toughest weeks on Wall Street continues as American International Group (AIG) is unfortunately inching closer towards bankruptcy. After AIG’s request for a loan Sunday was denied by the Federal Reserve, and hopes of a rescue from the private sector has almost completely faded, one of the world’s largest insurers may not even make it through the day. A question that has been proposed ad naseum in recent weeks begs to be asked again — “Is this company too big to fail?”

AIG probably has one day to raise $75 billion to $80 billion, New York Governor David Paterson said today on cable- television channel CNBC. A collapse would be felt beyond the insurance industry, he said.

“It affects jobs, it affects policyholders, it affects drivers,” he told CNBC. “This is a catastrophic problem waiting if we’re unable to contain it.”

The Fed urged AIG to seek private capital and discouraged the insurer from expecting a loan from the central bank, according to two people with knowledge of the discussions. Goldman Sachs Group Inc. and JPMorgan Chase & Co. are working with AIG to determine how much the insurer needs, said two more people, all of whom declined to be identified because negotiations are private.

`Systemic Risk’

“AIG poses a systemic risk because it’s a large counterparty in the financial system,” said Prasad Patkar, who helps manage the equivalent of $1.8 billion at Platypus Asset Management in Sydney. “It’s too big to be allowed to fail.”

The Federal Government is reconsidering offering some form of financial support to AIG:

The government’s decision to reconsider providing some sort of the support to AIG comes under pressure from New York Governor David Paterson and policyholders AIG, who have asked the Fed to reconsider.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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