The unit could fetch between $700 million and $1 billion, Reuters said. The Washington Journal said the price being talked about is actually in the range of $1.2 billion to $1.5 billion. The negotiations are continuing and the timing of any deal is unknown.

AIG, which bought Hartford Steam Boiler, or HSB, for around $1.2 billion in 2000, is under pressure to sell assets around the world to pay off a huge government loan. The U.S. government saved AIG from bankruptcy in September with a rescue plan that has since ballooned to about $152 billion (the government had to boost the value of the bailout package back in November after the company deteriorated faster than had been expected). AIG has several years to repay the loans, but the company is trying to sell businesses as quickly as possible, both to free itself from the interest it is paying to the government and to avoid further deterioration in the value of its assets.

That is forcing AIG – which has 74 million customers and 116,000 employees in 130 countries – to shed or sell stakes in units globally. AIG said in October that HSB would be among the assets it would sell to repay the federal government. In fact, the Hartford Steam Boiler deal would actually be AIG’s first major divestiture as it seeks to repay as much as $60 billion in loans that it received as part of the September government rescue package, sources familiar with the situation told The Wall Street Journal.

However, as AIG moves to sell assets to repay the loan, it faces the twin challenges of its own weakness and the global credit crisis, which has made it difficult – if not impossible – for interested suitors to obtain financing for buyouts or other high-dollar projects.

Hartford Steam Boiler insures steam boilers around the world. It also offers inspection services and engineering consulting. It provides insurance for a range of risks, including insurance to cover the cost of lost business and the cost of needed repairs when equipment breaks down. The company was founded in 1866.
Founded in 1880 in Munich, Münchener Rückversicherungs-Gesellschaft AG, or Munich Re, provides reinsurance coverage to traditional insurance companies in 150 countries, for everything from oil rigs to satellites and hurricanes.

AIG shares closed Friday at $1.60 each. They’ve traded as high as $60.04 in the past 12 months.

Source: AIG Looking to Divest Division

The New York-based AIG will get $40 billion of new capital from the U.S. Treasury Department’s $700 billion bailout package, to help offset the damage wreaked by four consecutive quarterly losses, including a third-quarter deficit of $24.5 billion that the company announced yesterday (Monday), Bloomberg News reported. The U.S. Federal Reserve also is slashing an $85 billion loan to $60 billion, and is replacing a separate $37.8 billion loan to the insurance company with $52.5 billion in aid.

These actions were taken by the Treasury Department and the Fed after it became clear that the original deal would never save the foundering insurer. In total, AIG is receiving more than $150 billion in aid, the most ever provided to a private-sector company in the United States. Even so, Fed officials said they believed that taxpayers would be repaid.

The reason: The government is buying preferred shares of AIG stock, giving taxpayers an ownership stake in the company. In turn, restrictions will be placed on executive compensation at the firm, Forbes.com said.

U.S. taxpayers are assuming the additional risk in order to provide new AIG Chief Executive Officer Edward M. Liddy more time to salvage AIG. The insurer, which turned to the government in lieu of the bankruptcy courts in September, had planned to repay the original $85 billion loan package by selling some of its business units. But that plan stalled as the financial crisis hacked away at the value of these businesses, even as it hamstrung potential suitors by causing the credit markets to freeze up.

As AIG leaders looked for a way around that problem, the company continued to lose money. AIG’s third-quarter loss equaled $9.05 a share and compared with profit of $3.09 billion, or $1.19, a year earlier, AIG said in a statement. Losses in the past year erased profit from 14 previous quarters dating back to 2004, Bloomberg reported.

“It was obvious to me from Day One that the terms of that arrangement were really quite punitive in terms of the interest rate and the commitment fee and the shortness of it,” Liddy said in a Bloomberg Television interview yesterday. “I started really about a week after I got here trying to renegotiate.”

Although most media reports attribute AIG’s predicament to the collapse of portions of the U.S. mortgage market, Money Morning Contributing Editor Shah Gilani – a national expert on the credit crisis – wrote in a recent investigative series that what really imploded the venerable insurance giant was an accumulation of misplaced bets on so-called “credit default swaps.”

And in the current economic environment, that problem will only get worse, Gilani said in an interview over the weekend, as reports circulated that a new deal was coming.

“AIG’s continuing problems are nothing short of extensive losses on mark-to-mark accounting of its ill-conceived foray into credit default swaps,” Gilani said. And that situation “will only get exponentially and catastrophically worse as the economy falters and reference companies it wrote swap insurance contracts on actually default, turning AIG’s unrealized losses, the subject of its margin calls, into realized losses for the full amount of its liabilities.”

Gilani isn’t surprised that the government had to restructure the AIG bailout package. Nor is he surprised that no real suitors emerged for AIG business units, several of which are actually superb businesses.

“The pieces of AIG that are desirable, and there are several very profitable divisions, are not getting serious consideration because potential acquirers’ stock prices are in the tank and there’s no inherent value in [the potential suitors’] stock prices as equity capital,” Gilani said. “There’s no one riding to the rescue because the horses are in the barn and the barn is burning.”

The U.S. reversed its opposition to an AIG bailout when the Fed realized that the potential ripple effects of a complete collapse could cause other firms to collapse, as well. The original $85 billion loan was disclosed on Sept. 16, a day after investment bank Lehman Brothers Holdings Inc. (OTC: LEHMQ) was permitted to collapse. AIG got an additional $37.8 billion credit line to shore up its securities-lending program on Oct. 8, and on Oct. 30 received an additional $20.9 billion as part of the central bank’s commercial paper program, which was designed to unfreeze the short-term debt markets.

Source: Federal Government Grants AIG a New Bailout Package

Sullivan follows the departure of a wave of Wall Street top execs, including the recent bloodletting at ailing investment bank Lehman Brothers.

“On Wall Street, after Bear Stearns fainted, the other financial firms took smelling salts,” says Bill Bonner in The Daily Reckoning.

But some of them are beginning to look a little woozy, nevertheless. Lehman Bros. is said to be looking for $3 to $4 billion in new capital. The company has nine times as much in level 2 and level 3 assets as it has in tangible equity. And it’s not the worst. Merrill Lynch’s level 2 and level 3 assets equal 2,565% of its tangible equity.

And dear readers, be aware: “There’s another Bear Stearns out there,” say our friends over at The Motley Fool. “You may already own it. And just as with Bear Stearns, chances are you won’t see the collapse coming until it’s too late.”

Colleague Dan Amoss, over at Strategic Short Report, has pinpointed the next Bear Stearns – and warns that there is another credit crisis ready to jam the pipeline.

“Right now,” he tells us, “this company is desperately scrambling to dump more of its weak, illiquid assets…while laying off employees by the thousands…in a desperate bid to ‘fix’ its Wall Street profile, keep its ’shameful secret’ under wraps, and protect its stock.”

But that won’t work, Dan continues. “Buried deep in this firm’s mysterious ‘Level 3′ assets, where banks have regularly hid their riskiest mortgage-backed securities, this one company already has one very large multibillion-dollar real-estate-based asset that – just by itself – could be worth nearly 30% less than it was when this firm bought it.

“When this firm is forced to beef up earnings by selling this one asset, you’re already looking at billions in write-down losses right there. And that’s just where the unraveling begins.”

“Don’t buy shares of financial service companies with ‘Level 3′ assets of more than their capital,” says Martin Hutchinson in Money Morning.

That’s all the “Big Four” investment banks including Goldman Sachs, Merrill Lynch & Co. Inc. (MER), Morgan Stanley (MS) and Lehman Bros. Holdings Inc. (LEH), and most of the big commercial banks, too. Those Level 3 assets are probably worth very little in a real downturn, because there is no market for the assets and everybody else will be trying to sell them too.

According to Business Week, a shocking 80% of the companies in the S&P 500 index watched their market-caps shrink from October through the end the April.

At last count, banks and other financial institutions have written down nearly $320 billion from their books, in a desperate attempt to keep their heads above water. The International Monetary Fund estimates that institutions will write a cool TRILLION off their books before this sub-prime mess finally ends.

And the carnage continues. In just the past week: mortgage lender Fannie Mae posted a US$2 billion loss for the first quarter. Insurance giant American International Group posted a US$7.8 billion loss thanks to a big write down of its derivative holdings (that’s on top of a US$5 billion fourth-quarter loss). Yesterday, Citigroup announced plans to “wind down” about US$400 billion in assets to try to dig itself out of debt. Even Warren Buffett’s beloved Berkshire Hathaway lost a BILLION bucks on derivative investments last quarter.

But few know that while institutions and individuals alike bled funds through these last nine months, a small group of investors quietly reaped the rewards of these unforgiving markets. I can site one particular disparity that bred a much-needed trend change — a change that many were late to recognize.

And while this trend change paid off nicely already — if you were positioned for it — the potential for a second round of gains is quietly approaching. I’ll tell you how to jump on that trend in just a second. But first, let me set the stage…

You Needed a Strong Stomach to
Ride Stocks Last Year

Last year, global stocks experienced quite a rollercoaster ride. Last spring, things were flowing smoothly and markets were shooting higher. Emerging markets were some of the biggest winners, but equities as a whole were sucking up investment capital all over the world.

Then the global credit crunch hit the markets in July 2007. This market shock upset the risk-taking attitude among global traders and shook the life out of stocks.

Since then, the S&P has fallen sharply from its October 2007 highs. Even Chinese stocks, among the largest pre-credit-crunch gainers, are still well off their highs.

The last six months have not been kind to the risk-taking investor class. There have been very few positive developments to support a market rebound. Even still, many stock market participants are holding onto hope in the face of a laundry list of problems.

Too Soon to Raise the White Flag?

But are the warning flags being reined-in prematurely? After all, the risks are not necessarily subsiding:

• Financial firms all over the U.S. and Europe are still struggling to cope with the credit crunch, taking write-offs in the tens of billions of dollars
• Sub-prime mortgage losses and write-downs are expected to grow far larger. Market cuts and bruises are likely to morph into gaping wounds for major lending institutions
• Banks are unable or unwilling to expand lending practices — net losses and ratings downgrades are taking their toll on the banks overall capital

As I said the IMF says institutions will write-down a US$1 trillion from their books before we’re done. Current losses-to-date stand at US$300 billion. So apparently we’re only a third of the way through this mess, I think we can only credit the resiliency of the stock market bulls to the Federal Reserve.

They’ve lowered their Fed funds and discount rates substantially and given investors reason to believe stocks are set to turn back higher, sooner rather than later. It’s a classic case of the “mama-bird-will-save-us” mentality. Investors have expected a hand-fed meal and the Fed is doing what they can to deliver it.

This is One Mess the Fed Can’t Clean Up

Sub-prime mortgage problems in the U.S. morphed into a global credit crisis. And banks got themselves into trouble by investing in what has turned out to be complicated bundles of bad debt tied to sub-prime mortgages. And even though central banks have aimed their focus towards this ultimate concern, they’re dealing with seriously large masses of confusing debt-backed derivatives. And central bank efforts may not be enough to clean up this mess in a timely fashion.

It all started when financial rocket scientists in white lab coats created the most complex investments they could dream up. These irresponsibly contrived investments became known as derivatives.

Turns out, this breed of derivatives act a lot differently in the real world than their creators expected. And now banks are stuck cleaning up losses on investments they don’t understand. The result: Banks have become reluctant to lend money because the need to stockpile extra funds as a sort of “complicated investment insurance” is growing.

Already, hundreds of billions of dollars of bad debt has surfaced on institutions’ balance sheets everywhere. And while the Fed and others have made various efforts, it’s still bad debt and it’s still going to take time to account for the balance of this ill-advised decision making.

It’ll take a while for banks to get back to doing what banks do best — lending money comfortably.

Introducing the Ugly Sister of the FX Markets

Much of last year I focused on a large imbalance that had developed in the foreign exchange market. The British pound had risen substantially to levels well beyond reasonable valuation. And while the pound became exceptionally overvalued versus the U.S. dollar, it was the widening gap between the British pound and the Japanese yen that caught my eye.

As the pound became increasingly overvalued and the yen increasingly undervalued, it became more and more likely that the gap would soon collapse. The agonizing credit crunch became the catalyst that would begin to close this gap.

The chart below compares the British pound to the Japanese yen. Clearly, the British pound has appreciated substantially against the yen over the past seven years. The simple fact that traders and investors shunned low-yielding assets (like the yen) in favor of high-yielding assets (like the pound) explains this major separation.

Still, a few prominent players are set to report this week led by The Walt Disney Co. (DIS) (entertainment), Cisco Systems Inc. (CSCO) (tech), and American International Group Inc. (AIG) (financial services).

The Microsoft Corp. (MSFT)/Yahoo Inc. (YHOO) (and occasionally Google Inc. (GOOG)) soap opera will be worth watching – if only to make sure that Microsoft’s withdrawal isn’t a cover ploy for a hostile run at Yahoo [For a related news story in this issue of Money Morning that details Microsoft’s decision drop its pursuit of Yahoo, please click here].

A slow schedule on this week’s economic calendar will prompt a much greater focus on the dollar as investors speculate on whether the price run-up in commodities – and oil – is at, or near its end. Gold prices will help make that determination [For a related news analysis of gold prices in this issue of Money Morning, please click here].

U.S. Federal Reserve Chairman Ben S. Bernanke is scheduled to address the Columbia Business School on mortgage issues, though he’ll surely also be asked about central bank policies by a rapt audience whose members will hang on his every word. [Wasn’t he supposed to be on vacation?]

Last week’s earnings saw some energy companies that were benefiting from the most recent surge in energy prices. Though Exxon Mobil Corp. (XOM) only claimed the second-highest profit ever (it also holds the title for the single best quarter ever), the results nevertheless disappointed Wall Street, which was obviously pulling for a new record.

Likewise, Chevron Corp. (CVX) and BP PLC (BP) reported favorable periods. In the wake of the recent initial public offering (IPO) of credit-card processor Visa Inc. (V), rival MasterCard Inc. (MA) doubled its earnings last quarter as its international business helped overcome domestic weakness. Consumer-products giant The Procter & Gamble Co. (PG) also received good news from overseas with higher sales of consumer goods like diapers (Pampers), razors (Gillette), and shampoo (Head & Shoulders) from certain emerging markets.

Not all was rosy, however, as Sun Microsystems Inc. (JAVA) and food giants Kellogg Co. (K) and new Warren Buffet favorite Kraft Foods Inc. (KFT) each fell prey to the continued economic “challenges” in the U.S. market.

On the transactional front, investor Kirk Kerkorian will boost his stake in Ford Motor Co. (F), in turn a nice boost for the domestic auto industry. Time Warner Inc. (TWX) will be spinning off its 84% stake in its cable operation, Time Warner Cable Inc. (TWC).

And privately held M&M’s-maker Mars Inc. will buy Wm. Wrigley Jr. Co. (WWY) for over $20 billion in cash with financing help from famed sweet-tooth junkie, Warren Buffett.

Market Matters

Recession? What recession? For days, weeks, even months now, naysayers had been predicting the emergence of that dreaded “R” word with the release of 1st quarter GDP. Additionally, they claimed that the labor picture would continue to worsen, gas prices would hit $4 a gallon by summer, the dollar would be worth next to nothing, corporate earnings would signal more “gloom and doom,” and high-net-worth investors would be making dramatic allocation shifts from the “risky” equity markets.

Not so fast … the data released last week appeared to portray an economy closer to a rebound – far from the dire business climate the gloom-and-doomers had been predicting. A stronger dollar that may have placed a ceiling on oil (and other commodities) prices, and rich folks seemed to be looking for bargains in stocks.

Do we here at Money Morning buy into that totally bullish scenario?

Not necessarily.

But we do agree that the next few days, weeks, and months are going to get more interesting.

The latest Fidelity Investment’s Millionaire Outlook reported (mildly) bullish findings among its surveyed investors who have average investable assets topping $4 million. Instead of decreasing their equity allocations, 27% of these millionaires plan to add stock positions during the next 12 months. Only 7% expect to sell out of equities, which logically deduces 66% will be staying the course. Real estate seems to be another “favored” asset class, as 14% of respondents say they will increase exposure to related investments. That doesn’t quite sound like “gloom and doom” at once.

Oil flirted with the $120 a barrel level before sliding on a stronger dollar and news that the Fed may play the “wait and see” game (see below). Equity investors again took a “things could have been worse” approach and sought out value in the aftermath of last week’s economic and earnings reports. Some analysts believe that a stronger dollar will mean the end to the rally in commodities, and investors (hedge funds) will take some related profits and move back into stocks.

Despite all the recent negativity, the Dow Jones Industrial Average surged more than 500 points in April, and the Standard & Poor’s 500 Index and Nasdaq Composite Index both rose about 5% – hardly the recessionary results many had been anticipating.