As news of Lehman Brothers'
AIG fell more than 50% at one point Monday morning on news it had rebuffed an offer from a group of private-equity funds that would have injected capital, but that could have left the insurer vulnerable to an all-out fire sale. Running out of options, AIG appears to have gone knocking on the Federal Reserve's door, looking to borrow around $40 billion to keep its books in working order. Without raising enough cash, some fear bankruptcy could be around the corner.
We've been here before
Let's break down the madness of this deal: AIG needs to raise $40 billion. It can't do it in the private or public market – a single-digit share price won't allow it to raise anything significant. Besides borrowing from the Fed, its other options include slowly selling off its still-healthy assets (which, importantly, AIG has plenty of). Does any of this sound familiar?
It should. Last week, Lehman Brothers announced its pending deal to raise money from a Korean bank went up in smoke. Reacting to the bad news, it announced plans to sell off some of its still-healthy assets. Amid a barrage of rumors, many pointed to the fact that Lehman could still borrow from the Fed's discount window if need be. It didn't work, mainly because investors were tired of the never-ending game of "Don't worry, we have plans in the works, everything is just fine" without ever seeing results.
Meanwhile, Washington Mutual's rumored plans to be bought out by JPMorgan Chase
Speak now or forever hold your peace
Without any firm news coming out of these two, investors are bound to assume nothing but the worst. It isn't necessarily that we know how bad they are, it's that we basically know nothing at all. If either of these companies comes out with a detailed announcement of something that's done -- not one that's just being planned -- both could see a huge rebound. Alas, until then, both are bound to remain in the black-hole death trap they've put themselves in.
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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.
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