Lehman Brothers has filed for the largest corporate bankruptcy in American history. Let’s put it into persective. Enron listed $63 billion in assets when it filed for Chapter 11 in 2001. WorldCom, which until now was the biggest bankruptcy, listed $103 billion in assets. On its latest filing, Lehman listed $639 billion. Lehman looks to be the biggest corporate bankruptcy by a factor of six.
The story now turns to American International Group. AIG (AIG: 3.15, +0.13, +4.30%) is one of the biggest counterparties on Wall Street. What that means is that they insured and were on the other side of many of the trades done by the big investment banks. Data from the Bloomberg terminal and published reports indicate AIG may have as much as $1 trillion in assets. Trillion, with a T. Many of those assets are believed to be related to complex derivatives instruments linked to mortgages, nasty things known as collateralized debt obligations that have rapidly lost value. The markets are keenly aware of this, sending AIG shares down 89% this year. What was once the eighth biggest company in America now has a market cap of just $18 billion, roughly the same size as food company Heinz. The company posted losses of more than $18 billion in the past three quarters.
AIG is working hard to raise capital. It’s been selling assets such as its aircraft leasing business, and is looking for billions more. If AIG is unable to raise capital it faces a possible credit rating downgrade. Remember, as an insurer, AIG does not have direct access to the Federal Reserve’s direct lending window (although it would like to). It may also face claims from Hurricanes Gustav and Ike.
While Lehman is a massive and tragic story, especially for its thousands of workers, there is a feeling that AIG is a bigger macro story for the markets, given its exposure to the derivatives business.
Will the Fed step in? Will an investor such as Warren Buffett step in with some kind of rescue package? The questions swirl and the situation is fluid. Watch it closely.
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