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AIG Hopes Help Shares Of WaMu, Wachovia

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BY SARA LEPRO

The Associated Press

Published: September 17, 2008

NEW YORK - Shares of troubled banks Washington Mutual Inc. and Wachovia Corp. recovered on Tuesday as investors grew hopeful that American International Group Inc. would receive much-needed funding.
WaMu shares jumped 32 cents, or 16 percent, to $2.32 after hitting a low of $1.50 and a high of $2.70 earlier in the session. The stock had shed 27 percent on Monday. Wachovia shares gained 80 cents, or 7.5 percent, to $11.51 after falling 25 percent in the previous session.

"I think the big story right now and what everybody is watching is the AIG story, period," said Bernie McGinn, founder and chief executive of McGinn Investment Management in Alexandria, Va. "It's because it is such a big company and because if it goes down, it goes down essentially because of subprime issues and everybody else can look at their balance sheet and go, 'OK, we've got the same issues.'"

The problems at the world's largest insurer stem from the exotic financial products it offers, including some that insure risky debt and bonds against default. The value of those products have deteriorated dramatically in the past year due to the ongoing disruption in the credit markets. Late Monday, all three major credit rating agencies cut AIG's ratings. The downgrade puts added pressure on AIG as it seeks to raise more capital.

Everyone is hoping for a good outcome to the problems at AIG, McGinn said. If the insurer were to fail, the ripple effect would be catastrophic to the entire financial system, and could ultimately bring down other banks with it because securities they hold that AIG has insured would no longer have that protection.

Some investors had been hopeful the Federal Reserve would cut interest rates on Tuesday, but the central bank kept the rates unchanged at 2 percent.

"The issue ultimately is not just the level of interest rates, it's the willingness of those who have money to lend based on the credit worthiness of the potential borrower," said Micah Green, partner at Patton Boggs LLP and former chief executive of the Bond Market Association.

The creditworthiness of WaMu has been of particular concern to investors.

Standard & Poor's Ratings Service cut its counterparty credit rating on WaMu to junk status late Monday. The action follows downgrades by both Moody's and Fitch last week.

"It's important to note that S&P attributed its action to worsening market conditions, and not to any material change in the evaluation of Washington Mutual's financial condition," the bank said in a statement responding to the rating action.

Concern about the fate of banks such as WaMu and Wachovia, which both have significant exposure to risky mortgage securities and other assets, has mounted in recent weeks and sent their stock prices plunging. WaMu shares are down about 85 percent this year, while Wachovia's have fallen 72 percent.

Worries about the financial sector were exacerbated Monday by the demise of Lehman Brothers Holdings Inc., which filed for bankruptcy protection, and the sale of Merrill Lynch & Co. to Bank of America Corp.
WaMu said in a statement Monday it has insignificant trading exposure to Lehman Brothers and no trading exposure to AIG.

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