AIG: More Credit Default Swap Trouble
Posted by Ray on June 30, 2009 under Main | 
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It appears that AIG has more credit default swap, CDS, trouble ahead. According to Bloomberg the firm has exposure to $192 Billion worth of European bank CDS which may prove to be a problem. This is a material problem because, according to Bloomberg and AIG statements, the valuation declines on credit-default swaps sold to European banks could have a “material adverse effect” on the company’s results. We all know what happened last fall with these things, but it is unclear what could happen this year.
Unfortunately, this plays into our estimates of a severe downturn in equities beginning now and lasting to the end of the year. However, the firm did say that, “The insurer said it doesn’t expect it will have to make payments under contractual agreements tied to the regulatory relief swaps. Most of the swaps will be terminated over the next 12 months, AIG said.”
We will see what happens, but it is clear that there could be major problems ahead. Just imagine $192 billion or even 20% of these contracts blowing up. We saw what $80 billion in bad bets did to the firm, drove it to bankruptcy and $180 billion had to be infused through the government. This has a lot of potential to do bad things to the firm and an already fragile market.
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