17 December 2008

AIG Has Another $30 to $200 Billion in Uncovered Losses to be Bailed Out

This is getting so brazen and so out of bounds that the atmosphere is starting to feel charged, like a college cafeteria after finals, or a big football win, or before the holidays.

You just know that at some point someone is going to throw the first piece of pie...

AIG Writedowns May Rise $30 Billion on Swaps Not in U.S. Rescue
By James Sterngold

Dec. 17 (Bloomberg) -- American International Group Inc., which already has suffered more than $60 billion in writedowns and losses, may have to absorb almost $30 billion more because of flaws in the way its holdings are valued.

An examination of AIG’s credit-default swaps guaranteeing more than $300 billion of corporate loans, mortgages and other assets not covered by a $152.5 billion federal rescue shows the New York-based insurer may value some of its positions at levels that don’t reflect distress in the markets, according to an analyst at Gradient Analytics Inc. and a tax consultant who teaches at Columbia University Business School in New York. Executives at two firms that have similar investments say they account for the securities differently than AIG does....

Rescue Package

The U.S. rescue plan announced in November, the government’s second effort to save AIG, covers only its most troubled credit-default swaps, about 20 percent of the $377 billion on the insurer’s books as of Sept. 30. Under the plan, a new government-backed entity will acquire collateralized debt obligations with a face value of $72 billion that had been insured by AIG swaps. An initial transfer of $46.1 billion of CDOs was announced on Dec. 2. A second fund bought troubled residential mortgage-backed securities with a face value of $39.3 billion, AIG said on Dec. 15.

Wider losses may cast new doubt on whether the federal funds will be enough to prop up AIG, the biggest U.S. insurer by assets. The U.S. package almost doubled from the $85 billion approved in September to save the company from bankruptcy. Previous miscalculations about the swaps contributed to the ouster of Chief Executive Officer Robert Willumstad and his predecessor, Martin Sullivan.

In November 2007, when AIG reported a $352 million loss on its swaps, it said it was “highly unlikely” the insurer would have to make payments on them. And last December Sullivan assured investors that losses from swaps on U.S. subprime mortgages were “manageable.”

European Banks

Credit-default swaps are contracts that protect investors who buy bonds or other securities. If a debt issuer or borrower misses payments, the seller of the contract -- in this case, AIG -- covers some or all of the losses. Even if a borrower doesn’t default, accounting rules may require insurers to write down the swap contracts when the value of the underlying assets drops.

AIG swaps not covered by the government program include guarantees on $249.9 billion of corporate loans and residential mortgages, most of them made by banks in Europe, according to the company’s third-quarter 10-Q filing. There are also swaps covering $51 billion of collateralized loan obligations, or CLOs, and $5 billion of lower-rated mezzanine tranches.

Writedowns on these AIG holdings total less than $1.5 billion so far this year, according to company filings, compared with $20 billion for the swaps guaranteeing the $72 billion of CDOs being acquired under the federal rescue....

Even if the credit markets were to stabilize, the valuations of structured securities are still far from where they should be, said Laurie Goodman, a former head of fixed- income research at UBS Securities LLC, who recently left to join Amherst Holdings LLC in Austin, Texas.

“The losses we’ve seen so far are a fraction of what we’ll be seeing,” she said.