AIG's collateral damage

AIG now isn't honoring it's real estate commitments, in shopping centers, low-income apartment portfolios, and other real estate developments.

From today's WSJ:

American International Group Inc., whose spending is being monitored by the Federal Reserve, has cut or delayed payments to some AIG real-estate ventures, potentially leaving shopping centers and apartment complexes across the U.S. short on cash to pay lenders and fund repairs and renovations, according to court documents and people familiar with the matter.

Affiliates of one real-estate firm, which teamed with AIG in a $2 billion purchase of a low-income apartment portfolio in 2007, have sued AIG for missed and delayed payments. Affiliates of the developer, Mitchell L. Morgan Management Inc., claimed in their lawsuit that they were told by AIG's top real-estate executive that "the current Federal Reserve funding arrangement with AIG does not provide for funding of AIG Global's commitments to its joint venture partners."
http://online.wsj.com/article/SB123837695953168223.html#mod=testMod

But what happens when AIG's contra party ins a New York bank? The trade gets unwound expeditiously, and advantageously to the bank.

From Zero Hedge:

During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever".

As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks - effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities - run a chart from say last September to current of say S&P 500 and Itraxx - credit has underperformed massively. This is largely due to AIG-FP unwinds.

I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period."

For those to whom this is merely a lot of mumbo-jumbo, let me explain in layman's terms:

AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.
http://zerohedge.blogspot.com/2009/03/exclusive-aig-was-responsible-for-banks.html

All the banks touted their profitability in January and February. Friday JPM's Jamie Dimon said March was a little softer.

Then the banks didn't have AIG's help!