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Mutual Funds - Mutual Funds.
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Posted by Monitor on December 10, 2008, 6:55 pm
AIG Faces $10B In Losses On Bad Bets
By SERENA NG, CARRICK MOLLENKAMP AND MICHAEL SICONOLFI
Of THE WALL STREET JOURNAL
Wed, Dec 10 2008
American International Group Inc. owes Wall Street's biggest firms
about $10 billion for speculative trades that have soured, according
to people familiar with the matter, underscoring the challenges the
insurer faces as it seeks to recover under a U.S. government rescue
plan.
The details of the trades go beyond what AIG has explained to
investors about the nature of its risk-taking operations, which led to
the firm's near-collapse in September. In the past, AIG has said that
its trades involved helping financial institutions and counterparties
insure their securities holdings. The speculative trades, engineered
by the insurer's financial-products unit, represent the first sign
that AIG may have been gambling with its own capital.
The soured trades and the amount lost on them haven't been explicitly
detailed before. In a recent quarterly filing, AIG does note exposure
to speculative bets without going into detail. An AIG spokesman
characterizes the trades not as speculative bets but as "credit
protection instruments." He said that exposure has been fully
disclosed and amounts to less than $10 billion of AIG's $71.6 billion
exposure to derivative contracts on debt pools known as collateralized
debt obligations as of Sept. 30.
Shares of AIG are down 11% to $1.73 in trading Wednesday.
AIG's financial-products unit, operating more like a Wall Street
trading firm than a conservative insurer selling protection against
defaults on seemingly low-risk securities, put billions of dollars of
the company's money at risk through speculative bets on the direction
of pools of mortgage assets and corporate debt. AIG now finds itself
in a position of having to raise funds to pay off its partners.
The fresh $10 billion bill is particularly challenging because the
terms of the current $150 billion rescue package for AIG don't cover
those debts. The structure of the soured deals raises questions about
how the insurer will raise the funds to pay the debts. The Federal
Reserve, which lent AIG billions of dollars to stay afloat, has no
immediate plans to help AIG pay off the speculative trades.
The outstanding $10 billion bill is in addition to the tens of
billions of taxpayer money that AIG has paid out over the past 16
months in collateral to Goldman Sachs Group Inc. and other trading
partners on trades called credit-default swaps. These instruments
required AIG to insure trading partners, known on Wall Street as
counterparties, against any losses in their holdings of securities
backed by pools of mortgages and other assets. With the value of those
mortgage holdings plunging in the past year and increasing the risk of
default, AIG has been required to put up additional collateral --
often cash payments.
AIG's problem: The rescue plan calls for a company funded largely by
the Federal Reserve to buy about $65 billion in troubled CDO
securities underlying the credit-default swaps that AIG had written,
so as to free AIG from its obligations under those contracts. But
there are no actual securities backing the speculative positions that
the insurer is losing money on. Instead, these bets were made on the
performance of pools of mortgage assets and corporate debt, and AIG
now finds itself in a position of having to raise funds to pay off its
partners because those assets have fallen significantly in value.
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