American International Group Inc, thrown a $20 billion lifeline by New York state, came under renewed pressure yesterday as ratings agencies downgraded the insurer's debt and the financial sector meltdown spread.
Fears that AIG, once the world's largest insurer by market value, could be the next financial giant to tumble fuelled worries about the potential fallout.
"If AIG tanks, that will be the big one. AIG has more to do with the oil price right now than the Saudis do," said Larry Grace, an energy analyst at Kim Eng Securities in Hong Kong.
Asian share markets, many of them closed for a holiday on Monday, tumbled as investors absorbed the weekend's dramatic events on Wall Street, where Lehman Brothers filed for bankruptcy protection and rival Merrill Lynch agreed to be sold to Bank of America for $50 billion.
Big European markets were seen opening around three per cent lower.
Shares in AIG plunged nearly 61 per cent on Monday and the US Federal Reserve hired investment bank Morgan Stanley to review options for the firm, a person familiar with the situation said on Monday. AIG has lost 92 per cent of its value this year.
AIG's ratings downgrade could force it to post more collateral and nullify insurance contracts, possibly setting in motion a chain reaction that could threaten its survival.
"You don't just have a potential impact on the reinsurer side, you have it on the institutions that might be holding AIG paper," said Lorraine Tan, director of research for Asia at debt rating agency Standard and Poor's in Singapore.
"This would have a much bigger impact than a bank going down like Lehman or Bear (Stearns) or even a Wachovia or WaMu in the US. AIG has a much bigger presence globally. Their reach to a global customer base is quite sizable," she said.
Top US savings and loan Washington Mutual Inc. saw its rating cut to "junk" status by Standard & Poor's amid concerns about mortgage losses. Its shares slid in after-hours trading after a 27 per cent drop in the regular session.
Moody's Investors Service cut AIG's rating to A2 from Aa3, a two-notch downgrade. S&P 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.
AIG's ratings are still investment grade, although all three agencies said more downgrades could follow.
Again seeking a private solution to Wall Street's woes, the Fed had asked JPMorgan Chase & Co and Goldman Sachs Group Inc. to explore arranging $70-$75 billion in loans to support AIG, among other financing options, another person familiar with the situation said.
AIG turned to the Fed late on Sunday after failed talks with several buyout firms and Warren Buffett's Berkshire Hathaway. The company has also said it was exploring asset sales. Asian stocks tumbled across the board, with Tokyo down more than five per cent at a three-year low. Japanese government bond futures jumped by their daily limit of three full points as investors fled to safe havens, while Japan's central bank said it would strive to maintain stability in financial markets.
Mizuho Trust & Banking, part of Japan's second-largest bank Mizuho Financial Group, more than halved its six-month net profit forecast due to exposure to Lehman.
The MSCI index of Asia-Pacific stocks outside Japan lost close to five per cent to its lowest since August 2006.
"The second leg of the subprime crisis has begun," Jun Kwang-woo, head of South Korea's Financial Services Commission told reporters. "It could be painful but a recovery, once in place, may be rapid."
US stocks tumbled on Monday, with the Dow Jones industrial average dropping more than 500 points, or 4.4 per cent, as Wall Street had its worst day since markets reopened after the September 2001 attacks.
There was speculation that Wall Street's worsening meltdown could prompt the Fed to act. US short-term interest rate futures rose sharply on Monday, reflecting the higher prospects for a rate cut at or before yesterday's Federal Reserve meeting.
The iTRAXX Asia ex-Japan high-yield index a key measure of risk aversion, widened by over 50 basis points from Monday's levels to a record 700/750 bps. The equivalent investment -grade index widened by 20 bps to 195/210 bps, also a record.
Darkening one of the few bright spots from the weekend's mayhem, Bank of America - which would surpass Citigroup Inc as the country's largest bank by assets with the planned takeover of Merrill - saw its shares plunge by 21 per cent.
"The concern for Bank of America is the debt that they are acquiring," said Marc Pado, US market strategist at Cantor Fitzgerald & Co in San Francisco. "Secondly, is it too big a purchase?
"They are dealing with Countrywide right now. Did they need to be dealing with this as well? There's some concern they might have bit more than they could chew."
The state of New York, where AIG is based, sought to bolster the stricken insurer with a complex asset swap giving it a $20 billion lifeline, but its longer-term rescue depended on additional funding.