It's a well known fact that AIG served a useful purpose in the credit boom as a conduit for banks to buy more credit derivatives than they ought to have. By insuring firms such as Merrill Lynch, Goldman Sachs, and Citigroup against billions in potential losses on the toxic assets, AIG essentially served to propel the boom in mortgage backed securities to stratospheric heights.
Now, AIG may be about to become a more miniature conduit of a different kind, allowing the world's fastest growing economy's second largest lender by market value to circumnavigate China's policy of deliberate deleveraging.
For the first half of 2009, lending in China reached unprecedented levels. By June, lending by domestic financial institutions had risen to 1.53 trillion yuan, or $223.7 billion. Then, in July, it cooled dramatically, to just 355.9 billion yuan ($52 billion). That deleveraging is part of a Chinese government policy to prevent bad debt from piling up and souring the year's phenomenal economic growth, which has propelled the stock market 80 percent higher since January.
At the forefront of the picture is China Construction Bank, a $190 billion behemoth listed in Shanghai and Hong Kong. It said earlier this week that it would reduce its lending for the next two quarters by up to 70 percent.
But then the bank went and bought AIG Finance (Hong Kong) for $70 million in cash. Construction can afford the acquisition: with $186 billion in cash reserves, including $2.9 billion from a recent bond offering, the AIG Finance buyout makes just a tiny dent in the firm's formidable green arsenal.
The deal is the first foreign acquisition by Construction in 3 years; at the same time, foreign income represents just 1.7 percent of the bank's earnings. It's not hard to figure out that with a tightening of lending policy at home, Construction is looking further afield now for ways to match its first two quarters of income. AIG Finance represents a great opportunity for Construction, with plenty of ready-to-lend products such as mortgages, prime finance, credit cards, premium financing and personal loans to boot. All it needs is cash to build them, and that's hardly something Construction is short of right now.
On The East-West Horizon?
The AIG Finance acquisition makes for interesting contemplation when you consider the vast number of beaten-down, but perfectly usable lending corporations on offer at fire-sale prices right now in the U.S., such as CIT Group and GMAC. It wouldn't be surprising to see either as tempting offers for Construction's rivals should China clamp down any more on domestic lending.