AIG (AIG) may lose over $20 billion for the trailing four quarters ending with the current period. It says the unprecedented credit crisis bought on by the failure of Lehman (LEH) requires it to ask outside investors and the Fed for $40 billion.

One plan would involve private equity firms. According to The Wall Street Journal Kohlberg Kravis Roberts & Co. and TPG offered to inject capital into AIG if the Fed agreed to provide the insurer with a bridge loan until its restructuring plan was completed.

The trouble is that the assets that AIG plans to sell may not bring in nearly enough money to cover the borrowing that it wants to take on. AIG may sell its auto insurance operation, annuities unit, and aircraft leasing company. If the current credit crisis worsens and AIG becomes desperate, buyers may offer low-ball numbers to pick up the assets leaving that company with a relatively small pile of cash to cover its new debt.

The government may turn down AIG’s request on the basis that it is not willing to risk any capital to help a failing US financial company. AIG will make the case that it only wants the money for a short time. What it cannot say is if it will have the capacity to pay that loan back.

AIG’s market cap is only $32 billion. That does not speak to the value of its better assets. Their value is masked by the huge amount of toxic paper the parent company has on its books. But, even with an infusion of capital, AIG could fail for the simple reason that its best businesses are being devalued by a flat spin in the markets.

Douglas A. McIntyre

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