Lehman Brothers collapses, AIG is fighting for time.

In what is shaping up as a watershed event and a day that will be long remembered in US Financial history, we witnessed today the evaporation of tens of billions of dollars in market capitalization and personal wealth with the filing for bankruptcy by Lehman Brothers. The human cost and personal toll this will extract financially is beyond the scope of most ordinary people to comprehend, but just think about this one nugget.

Lehman Brothers on it's latest financial filing stated they had assets of $639 BILLION and as of this morning their stock is trading for 18 cents a share. This is the largest bankruptcy filing in US history, dwarfing Enron and World Com which were relatively meager in size at $63 billion and $103 billion respectively.This is a financial melt down of a scale and scope that is literally unprecedented in history and the repercussions are yet to be felt as this financial behemoth now needs to be unwound and chopped into pieces. 

Of equal concern now is the immediate future and survival of AIG, the nations largest multi-line insurance company. If you are in the business of settlements, insurance and litigation you run into AIG on an almost daily basis and the magnitude of the disaster of their potentially coming unglued financially would be immense. To put it into perspective, AIG has, according to public records, filings and Bloomberg, assets in it's combined entities in excess of $1 Trillion, but as of this morning it needed a special dispensation from the State of NY to tap it's insurance subsidiaries for $20 billion to stay afloat through the week.

While I profess no great love for AIG, as they have been the literal Evil Empire of the insurance business and a primary driver of many of the anti-plaintiff practices that polluted the settlement business for the last 20 years, a collapse of this magnitude would be potentially ruinous for stockholders, policyholders and hundreds of thousands of others so I believe it is in the interests of every one in the financial and legal community to work to support their continued survival.

The way that is done is to do what cowboys out here in the American West use to do when they were tending huge herds of cattle. That is don't make any sudden movements, speak in a low, calm voice and project confidence and strength to the herd, even singing to them to calm them down. How does that relate to AIG's situation? Basically anyone in the claims, insurance or financial community that has the ability or platform to address claimants, lawyers and others needs to reinforce the size, scope and diversity of an entity such as AIG and do what ever is necessary to make people realize that the single worst thing they can do in relation to AIG business is to stop quoting them for structures, foolishly suggesting people cash out of existing contracts or raise undue or excessive alarm about their circumstances.

The facts are that AIG made an exceptionally large and unwise move into the business of selling "insurance contracts" protecting other banks, underwriters and mortgage companies against losses tied to subprime loans and other risky assets. When times were good they collected huge fee's and allowed these risky assets to obtain a higher then deserved credit rating when sold in pools of mortgages to institutions by having the risky credit piggy back of the AIG AAA or AA+ ratings. The current panic is that if AIG is downgraded to an A or BBB credit that loan covenants will kick in that could set off a chain reaction that could put the entire company at risk. This was a moronic business decision and we can debate the repeal of The Glass Stegal Act that occurred in 1999 and it's inevitable consequences another time. For now we need to focus on the problem at hand and our respective roles in avoiding a panic that need not happen.

Essentially what AIG needs is time and cheap cash and today they spent every minute pulling every available lever to allow them to access cash from their own subsidiaries to the tune of $20 billion, a move that required the state of NY's approval. They also spent most of the day pleading for access to the Fed's lending window to avoid the necessity of trying to raise cash in the private market for the short term, something that is probably now impossible for them to do given the publicity of their cash crunch.

If they can ride out the short term storm, expect to see the jewels of the AIG empire put on the auction block, companies such as American General, Sun America and it's air craft leasing arm International Lease Finance Corp sold off to larger entities. However, the question that will keep us all on the edge of our seats will be if AIG management and the big boys on Wall Street can keep this monster afloat long enough to do an orderly sale of it's assets and avoid a collapse that could drag the entire US Stock market down with it. Remember, the assets are there to pay claims and benefits, the company and it's management just needs time and breathing room to do what is necessary and I pray we don't have any John Garamendi's out there who do something stupid just for political purposes.

Remember, stay calm, move slowly and project confidence, even if your scared to death. It's a matter of our joint survival and we don't need anyone doing anything stupid to start a stampede.


The Legal Broadcast Network will be doing a special edition on the topic of the AIG liquidity crisis and how planners, attorneys and others should respond to it later today.

Posted on September 15, 2008 and filed under Professional practices.