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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