I have been of the opinion that we will be re-living the second half of 2008 this Fall and Winter.
Damned if I didn't see this B'berg article about AIG dated 6/30/09 which at first glance I thought must have been written during last year's gloomy days...the more things change..:
AIG Discloses New Risk on Derivatives Sold to Banks
By Hugh Son
June 30 (Bloomberg) -- American International Group Inc., the insurer bailed out by the U.S., said that valuation declines on credit-default swaps sold to European banks could have a “material adverse effect” on the company’s results.
The risk of losses on the derivatives may last “longer than anticipated,” the New York-based insurer said late yesterday in a regulatory filing updating the “risk factors” in its 2008 annual report. The firm had $192.6 billion in swaps allowing lenders to reduce the funds they had to hold in reserve as of March 31, AIG said.
“They’re guaranteeing close to $200 billion in assets in probably the riskiest environment in our lifetimes,” said David Havens, managing director at investment bank Hexagon Securities LLC. “It’s a huge number -- if there was any surprise, it’s that this hasn’t been flagged before.”
Gerry Pasciucco, hired from Morgan Stanley in November to clean up AIG’s Financial Products operation, is under pressure to unwind contracts at the unit, which brought the insurer to the brink of bankruptcy with separate bets tied to subprime home loans. Collateral payments tied to mortgage-linked swaps drained AIG’s cash last year, forcing the firm to seek a U.S. rescue.
“Given the size of the credit exposure, a decline in the fair value of this portfolio could have a material adverse effect on AIG’s consolidated results,” the company said yesterday about the European contracts.
The insurer slipped 22 cents, or 17 percent, to $1.11 at 9:41 a.m. in New York Stock Exchange composite trading. AIG has plunged 96 percent in the past 12 months.
Pasciucco said in an April interview that winding down the bets would take until at least the end of 2010.
Accounting Changes
The insurer said it doesn’t expect it will have to make payments under contractual agreements tied to the regulatory relief swaps, most of which will be terminated over the next year. Because of accounting changes, benefits to banks from the contracts will diminish after Dec. 31, the insurer said. The pace at which AIG terminates the transactions will be affected by credit performance of underlying assets, the company said.
“No event related to these securities or their holders prompted this filing,” said Christina Pretto, a spokeswoman for AIG, in an e-mail today. “As part of the SEC comment period on our financial disclosures, we are reclassifying our previous disclosures on the regulatory capital book as ‘risk factors.’”
AIG said it was unable to provide full details on the value of assets backed by the swaps because of confidentiality agreements with counterparties and lack of information about debtors on loans tied to the contracts.
Home Loans
The $192.6 billion figure for the swaps is comprised mostly of $99.4 billion tied to corporate loans and $90.2 billion linked to prime residential mortgages, the insurer said in a May 7 filing. The combined total was reduced from $234.4 billion on Dec. 31.
Most of the home loans tied to the European swaps are first-lien mortgages for owner-occupied properties, the insurer said in March. The other transactions include secured and unsecured corporate loans.
The fair value of the derivative liability was $393 million as of March 31, compared with $379 million on Dec. 31, according to AIG filings.
AIG’s $182.5 billion bailout includes $30 billion to help retire swaps linked to subprime mortgages. The package also includes $22.5 billion to unwind the securities-lending program, a $60 billion credit line and an investment of as much as $70 billion.
To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net
Last Updated: June 30, 2009 09:42 EDT |
