What is with these guys? Another $30 billion?
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...
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.
Only $1.5 billion????
Based on the loss AIG has reported, as well as indexes showing declines in the value of European corporate loans and prime mortgages, Vickrey estimated that AIG may face at least $15.6 billion of additional writedowns on its swaps with the banks. He said other swaps not covered by the government rescue, including those on CLOs and mezzanine tranches, may result in another $12.6 billion of losses.
So the analyst that saw AIG's fraud in February, now sees another $28.2 billion of losses but AIG says no.
Lewis, the AIG risk officer, said in an interview that the company has “limited information” on which to base the value of most of the European loans and mortgages it has guaranteed. Though some assets underlying the swaps appeared to be declining in value, Lewis said the insurer followed accounting rules in providing its best estimates for the value of the assets and other securities on its books.
So with limited information they can tell you they have no losses?
“Our methods have been thoroughly vetted and externally evaluated,” Lewis said.
And why did he say that?
Lewis said the insurer normally marks the value of the assets underlying swaps to market levels since it is taking some risk in the transactions. The swaps with the European banks are different because they didn’t insure against losses, he said. Instead, they were bought to take advantage of European accounting rules that allow the banks to use the swaps to reduce the capital they’re required to set aside as loss reserves.
Isn't that what Ferguson of General RE was just sentenced for two years for?
The swaps are kept in place only until new accounting rules, known as Basel II, are phased in. Those rules eliminate the ability of financial institutions to reduce the capital they need to set aside by buying swaps. Once the rules kick in, Lewis said the swaps will be terminated.
As a result, Lewis said, even if the assets underlying the remaining swaps fall in value, AIG isn’t required to mark them to lower market levels.
That’s because, as the insurer said in its third-quarter filing, it “estimates the fair value of these derivatives by considering observable market transactions.” And the only relevant transactions are the swaps AIG has successfully unwound with the European banks, according to the filing.
So is it a swap or isn't it. Is this an insurance transaction? If it is, where is the risk? Is this going to end up on the Fed's balance sheet named MAIDEN III paid for by the taxpayer?
That’s what happened in this year’s second quarter with one European bank that purchased a swap to cover $1.6 billion of mortgage-backed securities. When AIG determined the purpose of the swap wasn’t to reduce capital requirements, it took a loss of $397 million, equal to about 25 percent of the face value of the assets, according to company filings.
So in the 2nd quarter, AIG had to book a loss of $397 million, because for some reason, the swap, that they said wasn't a swap, wasn't need for the European's bank capital position, but it was actually a hedge. And AIG had to eat the loss!
Now AIG could conceivable have another $30 billion of losses, but AIG says no, because the European bank has to absorb the first 10 or 15% of the losses???
What does the SEC filing state?
Given the significant deterioration in the credit markets and the risk that AIGFP’s expectations with respect to the termination of these transactions by its counterparties may not materialize, there can be no assurance that AIG will not recognize unrealized market valuation losses.
AIG has never told the truth yet. They haven't even paid up for the LaCrosse players from Duke who were falsely accused of rape!
When will these crooks and thieves from AIG ever be held accountable?
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